How to Swap Zero Coupon Bonds

While many people are significantly invested and understand the mechanics of both the stock and real estate markets, the bond market can seem a bit elusive. However, since bonds offer a guaranteed return upon maturity, they can be quite lucrative. Here are some tips on how to swap zero coupon bonds to enhance your investment portfolio.

Things You'll Need

• Zero coupon bonds
• Willing buyer

Instructions

1. Swap your zero coupon bonds for quality. Bonds are rated based on the borrower's ability to pay. For instance, US Treasury bonds are backed by the government. If the economy is good, then the bond is all but assured of being paid. However, if you buy a bond from a developing country that goes bankrupt, you may never see your money again. Many people seek to swap zero coupon bonds for safety (meaning they have a low risk) or for return (meaning the bond will pay more money, but the risk of the borrower's not paying is higher).

2. Enhance the return on your portfolio. If your portfolio is not reaching your desired goals, you can swap a safer bond that offers less money for a riskier bond that will yield a greater return.

3. Benefit from interest rate changes in the market. Interest rates on bonds are traded every day the market is open. Therefore, there are fluctuations in price and return on investment. If you can swap your bond for the same level of risk and get a better return, do so. Check your bonds frequently to see if you can get a better payout.

4. Lower your overall tax burden. Certain bonds are tax free because you are giving money to a government municipality. Therefore, it wouldn't make sense to tax you on income because they are financing their own government on those very same taxes. Investigate which bonds can reduce your tax debt.

5. Find a trader with whom to swap your bond. Whether you use a high-priced broker or a discount online service, you can list your bonds along with their status, maturity date, interest rate and grading level. Other traders will take interest and contact you if they wish to trade. Of course you'll pay a small commission to the broker. In this way "swapping" zero coupon bonds is much like buying a stock where you have two parties who are looking to better their portfolio.

6. Continue to do your homework. Just because you've swapped out your bonds doesn't mean you are done with your bond portfolio. Keep on top of current market trends and changes. If you don't, it could cost you quite a bit of money.

Tips & Warnings

• A zero coupon bond is a bond that has a fixed maturity date with a built-in price you will be paid. For instance, US Treasury bonds often promise to double in value over a 10- to 15-year time span, depending on current market conditions. This differs from other types of bonds or fixed investments where interest is compounded daily, monthly or yearly.