Bond Swap

A bond swap is a strategy where an investor sells one bond and uses the proceeds to purchase another bond, typically to achieve a specific financial objective. Reasons for executing a bond swap include improving yield, adjusting the portfolio’s duration, taking advantage of tax benefits, or reducing credit risk. Bond swaps can be used to replace underperforming bonds with those expected to perform better, or to take advantage of changing market conditions. This strategy is often employed by institutional investors and portfolio managers to optimize the performance of their bond portfolios.

Example

An investor might sell a lower-yielding government bond and use the proceeds to buy a higher-yielding corporate bond, thereby increasing the portfolio’s overall return.