Automated Bond Ladders: 15+ Terms to Know

We’re on a mission to build a financial system that favors people, not institutions. We want to help unlock great investing for everyone. One way we’re doing this is through our automated ladder of US treasuries, the Wealthfront Automated Bond Ladder. As you navigate your bond ladder, you may discover new terminology unique to this investment. So, we’ve defined several key terms to help you make informed decisions about your bond ladder, without the often complex and cumbersome financial jargon.

Average yield

This is the average of all yields (also known as yield to maturity) across all bonds in a ladder. It’s annualized and is after our 0.25% management fee. We’ll show you the average yield for your bond ladder before your initial deposit, after you fund your ladder, and before you make any additional deposits.

Bond ladder

A bond ladder is a portfolio of bonds with varying maturities, designed for capital preservation and predictable yields. When bonds mature, we’ll automatically reinvest funds back into your ladder.

Cash balance

Your cash balance is used to cover our advisory fee and hold uninvested cash. This cash balance remains in your Automated Bond Ladder Account (separate from your Wealthfront Cash Account), since bonds can only be purchased in whole quantities. We’ll invest this when there’s enough to buy a bond or cash with new deposits.

Capital preservation

Capital preservation is a type of investment strategy to help mitigate risk. The primary goal is to safeguard your principal and minimize loss from market changes.

Coupon rate

Coupon rate is the annual interest rate paid on a bond based on its face value. For example, a bond with a $1,000 face value and 2% coupon rate pays $20 per year. Typically, these payments (called coupons or coupon payments) are made two times a year. 

The coupon rate and next coupon date for each bond in your ladder are provided in your rung details, accessible from your dashboard.

CUSIP 

A CUSIP is a unique 9-digit ID number assigned to registered bonds and stocks in the US and Canada. The CUSIP for each bond in your ladder is provided in your rung details. You can search the CUSIP to find additional information about the bond, such as yield and maturity date; however, we also show you this information in your bond details, so you don’t have to go searching for it.

Face value

Face value is the amount that a bond issuer agrees to pay once the bond matures. Since our bond ladder only includes US Treasuries, the bond issuer is the US Government. The face value for each bond in your ladder is provided in your rung details.

Interest

We define interest as the money you earn from coupon payments and matured bonds. If you have your account updates notifications turned on, we’ll notify you when your bonds pay interest.

Market value

Market value reflects the value of your current bonds if you sold them on the secondary market today. It also includes the cash balance in your account. This amount fluctuates daily due to changes in bond prices. When bond prices go up, your account’s market value will go up (and vice versa). As long as you hold your current bonds to maturity, you’re on track to get your principal back as well as any remaining interest that’s due to be paid. 

Maturity date

A bond’s maturity date (also known as due date) is when the bond is due to be repaid to you. On the maturity date, you will receive the principal (also known as face value) and any remaining interest. You may have a bond “maturing,” which means it’s coming due in the next 0 to 1 business days.

Reinvesting

Reinvesting is when the principal and interest from a matured rung is reinvested in a new rung. As this cycle continues, you’ll benefit from compounding interest. Automatic reinvesting turned on is the default setting for your bond ladder. We plan to support turning off automatic reinvesting in the near future.

Rung

In a bond ladder, each rung represents a different maturity date that the bonds within the rung will mature by. For example, if your ladder contains 12 rungs, you’ll have treasuries with maturities ranging from 1 month to 12 months. These rungs mature monthly, which means that a rung will mature every month, typically around the 15th day. For example, if rung 1 matures on Jan 15, rung 2 will mature around Feb 15.

The longest rung refers to the bond with the longest maturity period in your ladder. This determines the number of rungs it contains since your ladder is designed to have one rung mature per month.

Tax-equivalent yield

Since US Treasuries are exempt from state taxes, we provide the tax-equivalent yield to show you how the yield from your ladder compares to what you could earn from a yield that's taxed at both the federal and state levels.

The tax-equivalent yield accounts for our 0.25% advisory fee and is based on your estimated income tax rates using the tax information you provided.

Treasuries

We refer to all US Treasuries in your bond ladder as “Treasuries” or “bonds.” These are a mix of  Treasury bills and Treasury notes. Treasuries are issued by the US Government to fund government spending, along with taxes. They are backed by the “full faith and credit” of the US Government, meaning that the chance of default (either a missed coupon payment or principal payment) is extremely low.

Treasury bills

Treasury bills (commonly referred to as T-bills) are the shortest-duration securities issued by the United States Treasury. T-bills have initial maturities of 4, 8, 13, 26, or 52 weeks and don’t have any coupon payments between issue and maturity. Because of the lack of any intermediate coupon payments, T-bills are typically priced at a discount to their face value.

For example, a 52-week T-bill issued when short-term interest rates are 5%, might cost around $95 (for $100 in face value) at the time of initial issue. Thus, T-bill interest is earned through the discount to their face value instead of periodic coupon payments.

Treasury notes

Treasury notes have initial maturities or 2, 3, 5, 7, or 10 years. Treasury notes have coupon payments every 6 months, starting at about 6 months after the initial issue. The coupon payment varies with interest rates (and expectations about future interest rates) at the time of issue, but is never less than 0.125% of face value annually.

Yield to maturity

Yield to maturity (commonly abbreviated as YTM) is a bond’s expected annual return when held to maturity, based on its market price. When bond prices go up, this number will go down, and vice versa.

Yield to maturity at purchase

This is the yield you locked in when you purchased the bonds in your ladder. It updates when bonds mature or when new ones are purchased, but does not fluctuate with the market (like YTM).