Laddering

B is correct. Laddering staggers bond maturities across different time periods (e.g., 2, 4, 6, 8, 10 years), providing David with regular liquidity as bonds mature periodically while spreading reinvestment risk. Instead of reinvesting all $200,000 at once (which could occur at unfavorable rates), he reinvests smaller portions at different times, smoothing out interest rate fluctuations. This also provides periodic access to capital without selling bonds before maturity.

A describes a bullet strategy (all maturities concentrated at one point), not laddering. C is incorrect because laddering manages interest rate risk but does not eliminate it; bond prices still fluctuate with rate changes. D describes a barbell strategy (concentrating at short and long ends), not laddering, which has evenly distributed maturities across the time spectrum.

B is correct. The primary advantage of laddering is spreading reinvestment risk across multiple time periods. By staggering maturities (e.g., 2, 4, 6, 8, 10 years), investors avoid the risk of having all funds mature and require reinvestment at a single point in time when interest rates might be unfavorable. Regular maturities provide ongoing reinvestment opportunities at different rate environments.

A is incorrect; laddering does not necessarily provide higher total returns, it manages risk and provides liquidity. C is incorrect; laddering manages but does not guarantee protection from interest rate risk (bond prices still fluctuate). D is incorrect; laddering spreads maturities evenly across time periods rather than concentrating them at the long end.

A is correct. This represents a classic ladder structure with equal amounts ($20,000 each) maturing at evenly staggered intervals (1, 3, 5, 7, 9 years). The ladder provides regular liquidity every two years and spreads reinvestment opportunities across multiple time periods.

B represents a barbell strategy with concentration at the short end ($40,000 at 2 years) and long end ($40,000 at 10 years) with less in the middle ($20,000 at 5 years). C represents a bullet strategy with all maturities concentrated at a single point (5 years). D is another barbell example with only short-term ($50,000 at 1 year) and long-term ($50,000 at 10 years) positions with nothing in between.

C is correct (the EXCEPT answer). Laddering does NOT eliminate interest rate risk. Bond prices in a laddered portfolio still fluctuate with interest rate changes, and investors still face the risk of reinvesting maturing proceeds at potentially unfavorable rates. Laddering manages and spreads this risk across time but does not eliminate it.

A is accurate: laddering provides regular liquidity as bonds mature at staggered intervals (e.g., every 2 years in a 5-bond ladder), giving investors periodic access to capital without selling bonds prematurely. B is accurate: by spreading maturities across time, laddering ensures reinvestment happens at multiple points rather than all at once. D is accurate: instead of reinvesting all funds when rates are low (or high), laddering spreads reinvestment across various rate environments, smoothing out the impact of any single unfavorable period.

C is correct. Statements 1, 2, and 3 are accurate.

Statement 1 is TRUE: To maintain the ladder structure, as each bond matures, the proceeds should be reinvested at the longest rung (12 years in this case). This keeps the ladder intact with maturities spread from 2 to 12 years. For example, when the 2-year bond matures, reinvest in a new 12-year bond, which then becomes the new longest rung.

Statement 2 is TRUE: With bonds maturing in 2, 4, 6, 8, 10, and 12 years, a bond matures every two years, providing regular liquidity without selling bonds prematurely.

Statement 3 is TRUE: If rates rise, maturing bonds can be reinvested at the new higher rates, which is one advantage of laddering. Instead of being locked into old low rates for all bonds, the client benefits from rising rates as each bond matures and is reinvested.

Statement 4 is FALSE: The ladder should NOT be reconstructed to have all bonds mature simultaneously; that would create a bullet strategy, not a ladder. The goal is to maintain staggered maturities by continuously reinvesting maturing bonds at the longest term.