Another approach to bond investing is buying and selling systematically to take advantage of changing prices.
Fluctuating interest rates, shifting credit quality, and ups and downs in the economy all affect the short-term prices of bonds in the
secondary market.
That means that if you sell your bonds before their maturity dates, you have the potential to make money on your investment.
For example, if you own high-interest bonds as rates drop, you could sell the bonds for more than you paid and use the money to make a different investment. And since, in the interim, you've been collecting interest, the bonds could yield a tidy profit. Of course, you also have to consider the costs of buying and selling as you calculate your total return.
The risk you take is that rates will rise, reducing the market value of your bonds. If you can afford to wait until the next phase of the cycle, you won't have a loss. But if you must sell at a discount, your loss could wipe out your interest income and more.
Of course, trading bonds isn't suitable for all investors, and your brokerage firm may impose certain requirements to allow you to trade bonds.
Alexandra Lebenthal, President and Chief
Executive Officer of
Alexandra &
James, Inc.
Swap your bonds
If you're interested in exchanging one of your bonds for a different bond, you can make a bond swap. When you swap, you simultaneously sell one bond and purchase another one to replace it in your portfolio.
Swaps are a good way to change maturities, change your level of income, and even upgrade in credit ratings. What's more, making a bond swap can help you save on capital gains taxes if you're selling for a loss.
Alexandra Lebenthal, President and Chief