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.

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RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. 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 >>
  4. What are some risks a company takes when entering a currency swap?

    Read about the risks associated with performing a currency swap, including counterparty credit risk in the event that one ... Read Answer >>
  5. What are interest rate swaps on the OTC market?

    Learn about interest rate swaps and how they are traded over the counter, and understand the impact of Dodd-Frank on swaps ... Read Answer >>
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