Does it ever make sense to swap out of one bond into another with a higher interest rate?
Remember, bond prices decline as interest rates go higher and visa versa. Therefore, if you bought a bond with a 5% interest rate five years ago and see the same bond offering a 7% coupon, you will be selling your bond at a loss in order to get into the bond with a higher coupon. You will essentially have to sell the bond at a price which generates a yield equivalent to that of what the 7% bond is offering. The only situation this will work in your favor is if you anticipate taking a tax loss at year end. Credit Ratings and Bond Prices The investor community relies on bond credit ratings to indicate the probability of whether or not the debt will be returned to the bond holder, or defaulted. Credit ratings offer two pieces of information; the probability that you will receive your investment back at bond maturity and second, the probability that you will receive your coupon payments on time. There is nothing more secure than U.S. Treasury bonds, which are backed by the U.S. government
