DEFINITION of 'Pure Yield Pickup Swap'

A transaction in which bonds with lower returns are swapped for bonds with higher returns. With a pure yield pickup swap the sole purpose of the transaction is to increase yield, the new bonds will have a similar maturity and risk rating as the old bonds; only the coupon will differ.

BREAKING DOWN 'Pure Yield Pickup Swap'

Bonds earn yields for investors in three primary ways: coupon interest, capital gains and coupon reinvestment. Investors can use different types of bond swaps to take advantage of these different types of yields to try to improve their returns. Other examples of bond swaps include a rate anticipation swap, which is carried out with the goal of earning a better return from an expected change in market interest rates; a substitution swap, which exchanges two bonds that are similar in every way except price; and intermarket spread swaps, which seek to profit from yield mismatches between bonds in different sectors, such as government bonds and corporate bonds.

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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. How does a bond's coupon interest rate affect its price?

    Find out why the difference between the coupon interest rate on a bond and prevailing market interest rates has a large impact ... Read Answer >>
  4. What is an absolute rate?

    An absolute rate is easy to understand once you know the basics of an interest rate swap. An absolute rate is the fixed rate ... Read Answer >>
  5. 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 >>
  6. What is the difference between yield to maturity and the coupon rate?

    Read about some of the basic differences between a debt security's coupon rate and its yield to maturity, and learn which ... Read Answer >>
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