Bond Swap

What is a 'Bond Swap'

A bond swap consists of selling one debt instrument in order to use the proceeds to purchase another debt instrument. Investors engage in bond swapping with the goal of improving their financial positions. Bond swapping can reduce an investor's tax liability, give an investor a higher rate of return or help an investor to diversify a portfolio. The pure yield pickup swap and the tax swap are two common bond-swapping strategies.

BREAKING DOWN 'Bond Swap'

For example, selling a bond at a loss and using the proceeds of the sale to buy a different bond with better performance is a type of bond swap. This swap has two potential benefits: the investor can write-off the losses from the bond he or she sold to lower their tax liability, and they can potentially earn a better return with the newly purchased bond.

RELATED TERMS
  1. Pure Yield Pickup Swap

    A transaction in which bonds with lower returns are swapped for ...
  2. Rate Anticipation Swap

    A type of swap in which bonds are exchanged according to their ...
  3. Substitution Swap

    An exchange that is carried out by trading a fixed-income security ...
  4. Forward Swap

    A swap agreement created through the synthesis of two swaps differing ...
  5. Swap

    A derivative contract through which two parties exchange financial ...
  6. Reverse Swap

    An exchange of cash flow streams that undoes the effects of an ...
Related Articles
  1. Managing Wealth

    The Advantages Of Bond Swapping

    This technique can add diversity to your portfolio and lower your taxes. Find out how.
  2. Trading

    Currency Swap Basics

    Find out what makes currency swaps unique and slightly more complicated than other types of swaps.
  3. Investing

    Different Types of Swaps

    Investopedia explores the most common types of swap contracts.
  4. Managing Wealth

    How To Read Interest Rate Swap Quotes

    Puzzled by interest rate swap quotes terminology? Investopedia explains how to read the interest rate swap quotes
  5. Markets

    What's an Interest Rate Swap?

    An interest rate swap is an exchange of future interest receipts. Essentially, one stream of future interest payments is exchanged for another, based on a specified principal amount.
  6. Trading

    Get Active In Your Bond Portfolio

    Find out why being a couch potato with your bonds actually could be mashing your results.
  7. Investing

    Interest Rate Swaps Explained

    Plain interest rate swaps that enable the parties involved to exchange fixed and floating cash flows.
  8. Markets

    The Fast-Paced World of Libor & Fixed Income Arbitrage

    LIBOR is an essential part of implementing the swap spread arbitrage strategy for fixed income arbitrage. Here is a step-by-step explanation of how it works.
  9. Trading

    Hedging With Currency Swaps

    The wrong currency movement can crush positive portfolio returns. Find out how to hedge against it.
  10. Personal Finance

    How To Choose The Right Bond For You

    Bond investing is a stable and low-risk way to diversify a portfolio. However, knowing which types of bonds are right for you is not always easy.
RELATED FAQS
  1. Can bond traders trade on interest rate swaps?

    Read about interest rate swaps and why these transactions are performed by institutional actors in the bond market, not individual ... Read Answer >>
  2. What would motivate an entity to enter into a swap agreement?

    Learn why parties enter into swap agreements to hedge their risks, and understand how the different legs of a swap agreement ... Read Answer >>
  3. Can individual investors profit from interest rate swaps?

    Find out how individual investors can speculate on interest rate movements through interest rate swaps by trading fixed rate ... Read Answer >>
  4. When was the first swap agreement and why were swaps created?

    Learn about the history of swap agreements, the first swap agreement between IBM and the World Bank, and how swaps have evolved ... Read Answer >>
  5. Do interest rate swaps trade on the open market?

    Learn how interest rate swaps are traded on the OTC and interbank markets, and how these swaps can be used to arbitrage different ... Read Answer >>
  6. How are swap agreements financed?

    Learn how swap agreements are now cleared by swap execution facilities and require the use of collateral margin to hold, ... Read Answer >>
Hot Definitions
  1. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  2. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  3. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  4. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  5. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  6. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
Trading Center