Substitution swap

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Substitution swap

A swap in which a money manager exchanges one bond for another bond that is similar in terms of coupon, maturity, and credit quality, but that offers a higher yield.

Substitution Swap

A swap in which one sells a bond and buys another with the same maturity, risk, and other terms; the only difference between the two bonds is the fact that the bond the investor buys has a higher yield. Alternatively, one may directly swap the bonds without selling or buying them. A substitution swap allows one to increase one's return without changing the risk, or any of the other terms, of one's portfolio. See also: Markowitz efficient portfolio.