Laddered Tool banner

Laddered Investing Interest Rate Scenario Tool

Fluctuating interest rates can be a challenge for investors. Use this tool to create municipal or corporate bond ladder portfolios and explore how they’d perform in changing rate environments.


The information presented in the scenario tool is for hypothetical and illustrative purposes only. The tool does not reflect the performance of any specific Parametric product.


  • Municipal bonds
  • Corporate bonds

Disclosures

The results and projections produced by the tool are hypothetical, do not represent the experience of actual investors, and should not be relied on to make investment decisions. The use of tools cannot guarantee future performance. Any references to future returns should not be construed as an estimate of the results a client portfolio will achieve. Product availability and customization options may vary by firm and platform.

The output of this calculator is for illustrative purposes only and should not be considered investment, legal, or tax advice. The output is general in nature, may not apply to your individual tax situation, and is not intended to serve as the primary or sole basis for your investment or tax-planning decisions.

For more individualized information, you should consult your tax advisor or investment professional. You bear sole responsibility for any decisions you make based on the output of this calculator. The calculator makes certain assumptions that may not apply to you. The calculator has many inherent limitations, and individual results may vary.

Tax rates and tax laws are updated through June 10, 2019.

* Taxable income is your gross income, less certain adjustments (expenses, qualified account contributions, alimony paid), less all deductions (mortgage interest, property taxes, charitable contributions). For calculation purposes, head of household is used as the filing status. There are additional statuses available that are not reflected in this tool.

† The displayed rates have been rounded to the nearest hundredth of a percent. The top tax rate on investment income may not add up to the displayed rates due to rounding.

1 Income is grossed up (at 1 minus the effective tax rate), and all interest income is exempt from federal tax. If state portfolios are selected, all interest income is exempt from state and federal tax.

2 In tax years beginning in 2013 and later, a 3.8 percent net investment income tax applies to individuals, estates, and trusts that have net investment income above applicable threshold amounts. This is commonly referred to as the health care tax.

3 You are subject to a 2.35% Medicare tax that is also reflected in your marginal tax rate on ordinary income. As part of the Affordable Care Act, certain high earners are subject to a 0.9% additional Medicare tax on wages and self-employment income. Alternative minimum tax is ignored in this analysis, since the effect cannot be calculated only with taxable income. It is possible that it could impact your marginal tax rate. Some local jurisdictions may levy an income tax even though they are not shown as a choice in this calculator. If this is the case, your marginal tax rate may be higher than what is displayed.

Yields, cumulative income, and total return shown do not reflect the effect of fees imposed by an investment manager, nor do they reflect the impact of taxes. Fees and taxes will reduce the value of a client’s portfolio. Past performance is no guarantee of future results.

The simulations presented do not represent the results any particular investor actually attained. The information presented is based, in part, on hypothetical assumptions entered by the user. No representation or warranty is made as to the reasonableness of the assumptions made or that all the assumptions used in achieving the returns have been stated or fully considered. Simulated results have many inherent limitations, and no representation is made that any account will or is likely to profit similar to those shown in the scenarios. Actual performance results may differ, and may differ substantially, from the simulations. Changes in the assumptions may have a material impact on the hypothetical results presented.

Scenario assumptions: All returns and yields are gross of fees and taxes. The hypothetical laddered portfolio is defined by user inputs (such as the maturity start and end year in the tool above) where an equal investment is allocated to each maturity from “x” to “y” years. The length of the ladder “x” to “y” is determined by the “Ladder Range” input. As the first-year bond matures or rolls down outside the specified ladder range and needs to be sold, additional bonds are purchased on the furthest rung of the ladder using those proceeds. It is assumed that bonds are purchased at par, where the coupon equals the yield. “Income” refers to coupon income. Yield curves are calculated using a basket of bonds generated by a rules-based search of the municipal bond universe found on Bloomberg.

All tax-exempt yields, income, and return data shown do not reflect the effect of fees imposed by an investment manager, nor do they reflect the impact of taxes. Tax-equivalent yields, income, and return data reflect grossing up income using the highest federal and effective state tax rates and the 3.8% additional Medicare tax; however, capital gains taxes are not reflected. The effective state income tax rate is calculated using the highest state income tax rate and assumes a deduction from federal income taxes. Past performance is no guarantee of future results. Fees and taxes will reduce the value of a client’s portfolio.

The criteria used in selecting these bonds are as follows: All bonds are tax-exempt general obligation or revenue bonds. The maturity size for each bond is $2 million or greater. The dated date for each bond is greater than January 1, 2011. The range of maturities in the basket are from 1 to 20 years. Bonds with maturities greater than 10 years have a 9- or 10-year call. Bonds with maturities of 10 years and less have a coupon between 4% and 5%, whereas bonds whose maturities are greater than 10 years have a minimum coupon of 5%.

Each bond has at least one rating from either Moody’s, S&P®, or Fitch, with the lowest rating being AA-, A-, or BBB-, depending on the curve. The “Ladder Quality” input determines which yield curve is used. These are approximate yields and may not represent an investor’s actual portfolio yield. The hypothetical yield curves assume that approximately 50% of the holdings in the AA laddered sample are rated in the AAA category, that holdings in the A ladder sample are approximately evenly divided between AA and A category holdings, and that approximately 15% of the holdings in the BBB ladder sample are in the BBB category.

Changes in purchase yields over the life of the laddered portfolio are determined by modifying the original purchase yields by the “Interest Rate Shock” inputs. For example: If the user chooses a 2% rise in rates over 5 years, the model will assume rates rise 0.4% per year each year for 5 years for all rungs of the ladder. The model then assumes rates stay flat in the years following.

Maturing and sold proceeds are reinvested at the new adjusted yield in the longest rung of the ladder. Each rung has a specific duration. The “Starting Average Duration” is the average duration of the portfolio. The “Starting Average Maturity” is the average maturity of the portfolio. The “Starting Average Yield” is the average yield to worst of the portfolio. The change in yield is determined as follows: After one year, what was originally an “x” year bond will be an “x”-1 year bond with a yield equal to the original “x”-1 year yield, plus or minus any yield change applied from the model’s “Interest Rate Shock” inputs. The annual total return of the laddered portfolio is calculated by adding the average annual coupon income from each bond and the weighted average of the change in price of each bond. The change in price of each bond is calculated by subtracting the price at the beginning of the year from the price at the end of the year divided by the beginning price. The bond prices are derived using the price function assuming non-callable bonds, redemption at par, and semiannual coupons and are calculated off of the change in yields as detailed above.

Municipal securities are subject to the risk that legislative changes and local and business developments may adversely affect the yield or value of the strategy’s investments in such securities. Municipal securities are subject to credit risk, which is the risk that the issuer could default on interest or principal payments. Municipal securities are subject to interest rate risk. Rising interest rates could reduce the value of the bonds in the portfolio, thus adversely affecting the value of the overall investment.

Investing entails risk, and there is no assurance that Parametric will achieve profits or avoid incurring losses.


{F33BD959-1499-4857-91FB-3B0EF4ADCB43}

Loading...