Bond swap

Bond swap

The sale of one bond issue and purchase of another bond issue simultaneously. See: Swap; swap order.

Bond Swap

A situation in which one sells a bond while buying another bond at the exact same time. One may conduct a bond swap for any number of reasons, such as to receive a better coupon, to increase or decrease risk, or to attain a tax advantage from the sold bond and maintain a diversified portfolio with the bought bond. See also: Swap.

bond swap

The selling of one bond issue and concurrently buying another issue in order to take advantage of differences in interest rates, maturity, risk, marketability, and other factors. In some instances, especially with municipals, bond swaps are undertaken in order to realize losses for tax purposes. See also intermarket spread swap, rate anticipation swap, reverse swap, substitution bond swap, tax swap.
How can I obtain a tax benefit from a bond swap?

Bond swaps are done for many reasons (such as to improve income, improve quality, change maturity schedule, or enhance diversification). Thus, if the bond swap is worthwhile, it will be done for various economic reasons rather than simply for tax benefits. (Of course, there is nothing wrong with obtaining a tax benefit at the same time.) A tax benefit is often realized when an investor sells bonds that were acquired during a period when interest rates were lower than they were at the time of the swap. Because interest rates rose, bond prices fell, and the seller is able to generate a tax-deductible capital loss. The tax savings may be viewed as an ancillary benefit derived from the bond swap. A word of caution is in order, though: if you are considering a bond swap that will generate a tax-deductible capital loss, do not swap into a security classified by the Internal Revenue Service as basically identical to the one you sold until the appropriate time period has passed. Otherwise, the loss will be disallowed for tax purposes.

Stephanie G. Bigwood, CFP, ChFC, CSA, Assistant Vice President, Lombard Securities, Incorporated, Baltimore, MD

Bond swap.

In a bond swap, you buy one bond and sell another at the same time.

For example, you might sell one bond at a loss at year's end to get a tax write-off while buying another to keep the same portion of your portfolio allocated to bonds.

You may also sell a bond with a lower rating to buy one with a higher rating, or sell a bond that's close to maturity so you can buy a bond that won't mature for several years.

References in periodicals archive ?
Analysts were cautiously optimistic, but acknowledged the bond swap was unlikely to draw a line under Greece's troubles.
Bank of Cyprus's board of directors decided unanimously in a meeting today that the bank will take part in the voluntary Greek bond swap," the island's largest lender said.
07 billion eligible for the Greek bond swap plan at the end of June.
Major banks and pension funds threw their weight behind Greece's bond swap offer to private creditors on Wednesday, making it increasingly likely that the deal will go through and clear the way for a bailout package to avert a chaotic default.
Summary: LONDON - Gold prices fell more than 1 percent in Europe on Tuesday, pushing through support at $1,690 an ounce, as jitters over whether private creditors will agree to a Greek bond swap deal and wider euro zone growth pressured the euro versus the dollar.
Last week, officials from the Institute of International Finance, which represents the private creditors, held three days of intensive talks with Greek Prime Minister Lucas Papademos and Finance Minister Evangelos Venizelos on the bond swap, which is officially called-Private Sector Involvement, or PSI.
After weeks of hard bargaining, the chief negotiator for the Institute of International Finance, or IIF, the group representing private lenders, said that banks had offered the maximum they were willing to lose in a bond swap deal.
It said the net effect would be a e1/420 million hit to its equity, after allowing for a gain on completion of the bond swap and previous moves to account for the expected writedown.
Standard & Poor's on Monday cut Greece's long-term ratings to 'selective default', the second ratings agency to proceed with a widely expected downgrade after the country announced a bond swap plan to lighten its debt burden.
HEAT ON GREECE Athens turned up the heat on its creditors on Tuesday as it sought to secure a bond swap that will cut its mountainous debt, while the main bondholders group warned a disorderly default would cause over a trillion euros of damage to the euro zone.
Summary: LONDON -- Global growth concerns and uncertainty over the level of participation by private creditors in Greece's planned bond swap sent stocks and the euro lower on Tuesday.
Investors in a Swiss-law governed Greek government bond have teamed up to challenge the terms of Athens' proposed bond swap, highlighting the wave of litigation it could yet face, particularly over the minority of its debt not issued under Greek law.