BondSwapping1004

  • 格式:pdf
  • 大小:391.75 KB
  • 文档页数:9

AN INVESTOR

’S

GU

ID

E

Techniques to lower your taxes and improve the quality of your portfolio

BOND SWAPPINGCONTENTSWhat Is a Bond Swap?1

Why You Would Consider Swapping1

Swapping for Quality2

Swapping to Increase Yield3

Swapping for Increased Call Protection4

Anticipating Interest Rates5

Swapping to Lower Your Taxes6

Some Important Rules for Tax Swapping7

Other Tax Strategies9

How to Avoid a Wash Sale9

For a Personal Appraisal10

Bond Swapping Appraisal Form11

All information and opinions contained in this publication were produced by The BondMarket Association from our membership and other sources believed by the Associationto be accurate and reliable. By providing this general information, The Bond MarketAssociation makes neither a recommendation as to the appropriateness of investing infixed-income securities nor is it providing any specific investment advice for any particu-lar investor. Due to rapidly changing market conditions and the complexity of investmentdecisions, supplemental information and sources may be required to make informedinvestment decisions.

1

WHAT IS A BOND SWAP?A bond swap is a technique whereby an investorchooses to sell a bond and simultaneously purchaseanother bond with the proceeds from the sale.Fixed-income securities make excellent candidatesfor swapping because it is often easy to find twobonds with similar features in terms of credit quality,coupon, maturity and price.

In a bond swap, you sell one fixed-income holdingfor another in order to take advantage of currentmarket and/or tax conditions and better meet yourcurrent investment objectives or adjust to a changein your investment status. A wide variety of swapsare generally available to help you meet your specif-ic portfolio goals.

WHY YOU WOULD CONSIDER SWAPPING

Swapping can be a very effective investment tool to:•increase the quality of your portfolio;•increase your total return;•benefit from interest rate changes; and•lower your taxes.These are just a few reasons why you might findswapping your bond holdings beneficial. Althoughthis booklet contains general information regardingfederal tax consequences of swapping, we suggestyou consult your own tax advisor for more specificadvice regarding your individual tax situation.3(one basis point is 1/100th of one percent, or .01%).Moreover, during an economic downturn, higher-quality bonds, which represent greater certainty ofrepayment in difficult market conditions, will typical-ly hold their value better than lower-quality bonds.Also, if a market sector or a particular bond haseroded in quality, it may no longer meet your per-sonal risk parameters. You may be willing to sacri-fice some current income and/or yield in exchangefor enhanced quality.SWAPPING TO INCREASE YIELDYou can sometimes improve the taxable or tax-exempt returns on your portfolio by employing anumber of different bond-swapping strategies.In general, longer-maturity bonds will typicallyyield more than those of a shorter maturity will;therefore, extending the average maturity of a port-folio’s holdings can boost yield. The relationshipbetween yields on different types of securities,ranging from three months to 30 years, can be plot-ted on a graph known as the yield curve. The curveof that line is constantly changing, but you canoften pick up yield by extending the maturity ofyour investments, assuming the yield curve is slop-ing upward. For example, you could sell a two-yearbond that’s yielding 5.50% and purchase a 15-yearbond that is yielding 6.00%. However, you shouldbe aware that the price of longer-maturity bondsmight fluctuate more widely than that of short-termbonds when interest rates change. When the difference in yield between two bonds ofdifferent credit quality has widened, a cautious swap2

SWAPPING FOR QUALITYA quality swap is a type of swap where you are look-ing to move from a bond with a lower credit qualityrating to one with a higher credit rating or viceversa. The credit rating is generally a reflection of anissuer’s financial health. It is one of the factors in themarket’s determination of the yield of a particularsecurity. The spread between the yields of bondswith different credit quality generally narrows whenthe economy is improving and widens when theeconomy weakens. So, for example, if you expect arecession you might swap from lower-quality intohigher-quality bonds with only a negligible loss ofincome.

Standard rating agencies classify most issuers’ likeli-hood of repayment of principal and payment of inter-est according to a grading system ranging from, say,triple-A to C (or an equivalent scale), as a qualityguideline for investors. Issuers considered to carrygood likelihood of payment are “investment grade”and are rated Baa3 or higher by Moody’s InvestorsService or BBB– or higher by Standard & Poor’sRatings Services and Fitch Ratings. Those issuersrated below Baa3 or below BBB– are considered“below investment grade” and the repayment of prin-cipal and payment of interest are less certain.Suppose you own a corporate bond rated BBB(lower-investment-grade quality) that is yielding7.00% and you find a triple-A-rated (higher-invest-ment-grade quality) corporate bond that is yielding6.70%.1You could swap into the superior-credit,