Question

In a tax swap, a bond investor typically?

1) sells an issue which has a capital loss and replaces it with a comparable security.
2) sells an issue that has a capital gain and replaces it with a comparable security.
3) swaps a lower-yielding security for a higher-yielding security.
4) swaps a higher-yielding security for a lower-yielding security.

Answer 1

A bond investor usually engages in a tax swap by selling a bond with a capital loss and replacing it with a similar security to offset capital gains for tax purposes.

Step-by-step explanation:

In a tax swap, a bond investor typically sells an issue that has incurred a capital loss and replaces it with a comparable security. This strategy allows the investor to realize a capital loss, which can be used to offset capital gains from other investments, thereby reducing the investor's overall tax burden. The investor then replaces the original bond with a similar one to maintain a comparable position in the market.