With the end of the year close at hand, investors should consider whether they are going to take profits or losses in their bond portfolios by swapping. To refresh your memory: The main reason for a bond swap is the legal avoidance of income tax.
The holding period for a municipal bond begins the day after the trade date and ends on the execution date of the sale order. A gain is established on settlement date, and a loss is established on the actual trade date of sale. Swaps for losses may be executed as late as the last business day of the year for use against that year's taxes. So with time running out, consider an advantageous bond swap to enhance your portfolio and to benefit yourself tax-wise.
With the holidays now upon us, many people consider giving securities as presents. Here is a list of a wide variety of fixed-income securities. Perhaps some of them will strike a receptive chord for a gift for family, friends or oneself. Commercial banks offer money market demand accounts that are currently returning 9 percent. Banks also are offering investment certificates of deposit with 6- to 12-month maturities and available in minimums of $500 to $99,000 to return 9.30 percent. The T. Rowe Price Prime Reserve money market fund offers a taxable yield of 9.20 percent. Its government fund returns 8.01 percent. Price's tax-exempt money market fund offers a 5.97 percent yield, while its tax-free Short-Intermediate Fund returns 6.58 percent. Its managed long-term tax-exempt fund returns 8.56 percent.
Merrill Lynch offers a variety of unit investment trusts (UIT) that are available in units of $1,000 plus accrued interest. Merrill's current long-term tax-exempt UITs return between 9.90 and 10.00 percent. Merrill also offers a triple-A-rated municipal investment trust (MIT) with a 9.75 percent yield. On the taxable side, Merrill offers a long-term UIT with a current return of 12.26 percent. For those who want more yield, the brokerage firm of Drexel Burnham Lambert will offer in early January its second low-quality "junk bond" UIT, which should have a yield in excess of 14.0 percent.
An item that would fit well into IRA accounts would be zero-coupon bonds. In an IRA, the gain, or appreciation, is nontaxable and affords a good interest-compounding vehicle. Different brokerage houses offer Treasury zero-coupon bonds under various names -- Treasury Receipts, Tigers, Cats, Lions and so forth. Currently, five-year Cats are being offered to return 11.43 percent and sell for $51.90. A 30-year Cat sells at $6.75 and returns 11.40 percent.
The Treasury will offer a four-year note on Wednesday, in minimums of $1,000. It should return 10.67 percent.