Technique to lower our taxes

Here is a technique to lower our taxes and improve the quality of our portfolio. And that technique is bond swapping. A bond swap is nothing but a new technique whereby the investors choose to sell a bond and simultaneously buy another bond with the proceeds from the sale. Fixed-Income securities are the best securities for bond swapping because the two bonds have similar features in terms of credit quality, coupon, maturity and price. In Bond swap, we sell one fixed income holding for another in order to take advantage of current market and better meet our current investment objectives. But why we should consider swapping?

Swapping is a very effective investment tool to

· Increase the quality of our portfolio

· Increase our total return.

· Benefit from interest rate changes

· Lower our taxes.

When bond swapping is holding so many advantages, why will one not choose to opt for bond swapping? There is wide variety of swaps in generally available to help us meet our specific goals.

Swapping for Quality:

A quality swap is a type of swap where we are looking to move from a low quality bond which yields low credit to one which yields high credit or vice versa.

Swapping to Increase Yield:

We can sometimes improve the taxable or tax-exempt returns on our portfolio by employing a number of different bond-swapping strategies. In general, longer-maturity bonds will typically yield more than those of a shorter maturity bonds will; therefore, extending the average maturity of a portfolio’s holdings can boost yield.

Anticipating Interest Rates

If we believe that the overall level of interest rates is likely to change, we may choose to make a swap designed to benefit or help you protect your holdings.

If we believe that rates are likely to decline, it may be appropriate to extend the maturity of our holdings. we will be reducing reinvestment risk of principal and positioning for potential appreciation as interest rates trend down. Conversely, if we think rates may increase, we might decide to reduce the average maturity of holdings in our portfolio. A swap into shorter-maturity bonds will cause a portfolio to fluctuate less in value, but may also result in a lower yield.

If Bond market is best place to play in then everything related to bonds are safe. I think the bond swapping is best when we want to sell our bond in order to purchase another high yielding bond or buy a quality yielding bond.