A Publication of WTVP

Maturity dates on municipal bonds range from weeks to 30 years or more. This flexible time frame makes “munis” ideal candidates for a laddered investment approach to meet your needs for either future or present income. Ladders are sequentially maturing municipal bond portfolios providing structure, solidity, and predictable flow of principal and tax-exempt income. Although purchased at the same time, the bonds in a laddered portfolio may all be solid individually. Ladders can also reduce your exposure to reinvestment risk.

Plan One: Set the stage for future income

Suppose you want a more secure retirement or are planning for a child’s college education. You could create a zero-coupon municipal ladder with bonds coming due as tuition payments are needed or retirement contemplated. There would be no periodic interest payments. Zero-coupon municipal bonds are bought at deep discounts to their par or maturity value. The interest you earn is automatically reinvested and compounded at the stated yield to maturity, allowing you to secure annual lump-sum payments in the future.

Plan Two: Generate current income

If preservation of capital and interest income are equally important, you can build a laddered income portfolio to reflect those needs. Approximately the same amount of bonds or principal would mature on a regular basis for a specified period or maturity range. You might decide to make 10 investments in increments of $10,000 for a total of $100,000—each with a different maturity. If interest rates rise, the longer-term bonds would see some reduction in market value. However, as the shorter-term bonds mature, you could use the proceeds to buy longer-term replacements with new, higher yields.

Laddered municipal bond portfolios can be constructed to suit individual needs. From credit quality to coupon rates to maturity dates, the municipal market holds bonds to accommodate the most demanding inquiries.

To Learn More

The Economic Growth and Tax Relief Reconciliation Act of 2001 contains a number of other important changes, such as increased interest deductions for student loans, relief from the “marriage penalty,” and an expanded child tax credit. For complete details on these changes to the Federal Tax Code, be sure to contact your tax advisor. IBI