Bond Investment Strategies

Reasons You Might Sell a Bond Before Maturity

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:

  1. They need the principal. While buy-and-hold is generally 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.

  2. They want to realise 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.

  3. They need to realise a loss for tax purposes. Selling an investment at a loss can be a strategy for offsetting the tax impact of investment gains. An investor may want to achieve a tax goal without changing the basic profile of a portfolio; bond swapping may be one strategy for achieving that goal.  Consult your financial advisor for more information on how your tax purposes may affect your investment-selling decisions.

  4. 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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