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Investors following a buy-and-hold strategy can
encounter circumstances that might compel them to sell a bond prior to
maturity for the following reasons:
They need the principal
While buy-and-hold is generally best used as a longer-term strategy, life
does not always work out as planned. When you sell a bond before maturity,
you may get more or less than you paid for it. If interest rates have risen
since the bond was purchased, its value will have declined. If rates have
declined, the bond?s value will have increased.
They want to realize a capital gain
If rates have declined and a bond has appreciated in value, the investor may
decide that it?s better to sell before maturity and take the gain rather
than continue to collect the interest. This decision should be made
carefully, as the proceeds of the transaction may have to be reinvested at
lower interest rates.
They need to realize a loss for tax purposes.
Selling an investment at a loss can be a strategy for offsetting the tax
impact of investment gains. Bond swapping can help achieve a tax goal
without changing the basic profile of your portfolio.
They have achieved their return objective.
Some investors invest in bonds with the objective of total return, or income
plus capital appreciation or growth. Achieving capital appreciation requires
an investor to sell an investment for more than its purchase price when the
market presents the opportunity.
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