Bond Swap

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DEFINITION of 'Bond Swap'

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.

INVESTOPEDIA EXPLAINS '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. How are swap agreements financed?

    Since swap agreements involve the exchange of future cash flows and are initially set at zero, there is no real financing ... Read Full Answer >>
  2. What are the risks involved with swaps?

    The main risks associated with interest rate swaps, which are the most common type of swap, are interest rate risk and counterparty ... Read Full Answer >>
  3. What is the difference between compounding interest and simple interest?

    Interest is the cost of borrowing money, where the borrower pays a fee to the owner for using the owner's money. The interest ... Read Full Answer >>
  4. What is the relationship between modified duration and interest rates?

    Modified duration is a formula that measures the value of a bond in relation to changes in interest rates. Modified duration ... Read Full Answer >>
  5. How does inflation affect a company's short-term investments?

    Inflation marginally erodes a company's short-term investments. Short-term investments are typically ultra-safe liquid assets, ... Read Full Answer >>
  6. Which asset classes are the most risky?

    Equities is the riskiest class of assets. Dividends aside, they offer no guarantees, and investors' money is subject to the ... Read Full Answer >>
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