An investment advisor recommends a laddered bond strategy for a client who needs predictable income and capital preservation. Why might this strategy be suitable?

Question: An investment advisor recommends a laddered bond strategy for a client who needs predictable income and capital preservation. Why might this strategy be suitable?

Answer options:

• It maximizes exposure to long-term interest rate movements for capital gains.
• It concentrates maturity risk in a single year to simplify rebalancing. ✅ It provides diversification across maturities and mitigates interest rate risk over time.
• It specifically targets high-yield bonds for enhanced income.

Correct answer: It provides diversification across maturities and mitigates interest rate risk over time.

Explanation: A laddered bond strategy involves staggering bond maturities, which helps to diversify interest rate risk. As bonds mature, the proceeds can be reinvested at prevailing rates, providing protection against rising rates and offering predictable cash flows.