Ladder structure. Equal capital allocated to each rung. With N-year ladder and total capital C:
Capital per rung = C / N
Rung 1 matures in 1 year, Rung 2 in 2 years, …, Rung N in N years.
Yield curve slope. The tool assumes a mild upward slope: shortest rung yields (avg_yield − 0.25%), longest rung yields (avg_yield + 0.35%). Linear interpolation in between. This roughly matches a normal Treasury curve. In an inverted-curve environment (2023-2024) the shape would flip; in extreme inversion, very short rungs can yield more than long rungs — the tool does not model that case (use the Bond Yield Calculator for individual-bond precision).
Annual income. Sum of (rung capital × rung yield) for all N rungs.
Annual income = Sum [r=1..N] (C/N) × y_r
Where y_r is the yield on rung r.
After-tax income depends on bond type:
- Treasury: interest is taxable at federal but exempt from state and local (31 USC 3124). After-tax rate = (1 − fed).
- Muni in-state: tax-free at federal and state (excluding AMT exposure on private-activity bonds). After-tax rate = 1.0.
- Muni out-of-state: tax-free at federal only; state-taxable. After-tax rate = (1 − state).
- Corporate: taxable at both federal and state. After-tax rate = (1 − fed − state).
Average duration of an equal-weight ladder is approximately (N + 1) / 2 years. For a 10-year ladder, average duration is ~5.5 years — meaningfully less than holding a single 10-year bond. That is the rate-risk smoothing benefit.
Why not buy a bond fund? A bond fund has perpetual duration (no maturity), an expense ratio (10-50 bps), and NAV volatility from continuous mark-to-market. A ladder has a defined maturity for each rung, zero expense ratio, and book-value income visibility. For investors who can hold to maturity, the ladder usually wins.