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Corporate Bond Laddering

A conveyor of corporate bonds, also known as a bond ladder (likening each bond to a rung) is a good way of creating a portfolio designed to provide steady and reliable cash flow. This is essential within SIPPs in drawdown and when a portfolio has to meet a high level of fixed costs, like nursing home or school fees.

All investors, no matter what their tolerance to risk is, will benefit from having earmarked part of their portfolio that provides this cash flow. The higher risk investor may then consider more risk within the growth pot of their portfolio; whereas the lower risk side can build a further fixed interest focus and a smaller portion of quality Blue Chip dividend paying investments.

This approach can be used in a variety of scenarios and allows the investor to use their general investment account, ISA and pensions that allow personalisation.

So what exactly is it?

The conveyor arrangement is set up by investing in a number of fixed interest securities, for instance single corporate bonds or even Government Gilts. These offer a fixed and reliable income. The bonds will have staggered maturity dates that will cover a time period from 1 up to 10 years or even longer. As time passes by, the regular flow of income is paid into the cash float from which an income can be drawn on a regular basis.

As this cash float begins to reduce, the next bond to mature will drop off the end of the conveyor and provide a capital lump sum to top the cash up. This way, the income can continue to be taken without having to sell other investments, especially in periods of downward volatility. Of course, it may be that that only part or even none of a matured bond is needed sometimes in the cash float, in which case, the excess capital can be placed back at the beginning of the conveyor by purchasing another bond and maintain the flow of income.

Also, the growth pot, which may pay out some regular income too into the cash float, may be used to provide further lump sums to buy new bonds on the conveyor over time.
 

So how does it look?

A bond conveyor is as simple as it sounds. The diagram below demonstrates how this looks and the flow of cash over time:

  1. New bonds are purchased from funds available, whether from excess capital in the cash float or from the growth portion of the portfolio;

  2. Each year the conveyor moves the bonds along towards the maturity. During this time, they continue to pay out their fixed income into the cash float, from which the investor can draw an income;

  3. As each bond matures and drops off the end of the conveyor, the capital lump sum can be used to top up the cash float or reinvested back into a longer term bond, back at the beginning of the conveyor.

Corporate Bond Laddering

 
Fixed interest conveyor provides income from corporate bonds and gilts. Regular maturing bonds top up the float to help provide income stability.
 
 
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