What are the risks of including callable bonds in a bond ladder?
If you decide to include callable bonds in your ladder, these bonds may be called prior to maturity. If a bond is called, your interest payments cease and the principal is returned as of the call date. If you seek to reinvest the principal in a similar bond issue, you will likely have to accept a lower yield (and lower interest payments) consistent with prevailing interest rates. The ladder attempts to mitigate reinvestment risk, as bonds are scheduled to expire at regular intervals. You can reinvest the proceeds further out in the ladder, and buy bonds during varying market and interest rate conditions. A called bond will alter your payment schedule and the scheduled intervals of principal coming due.
