A swap which entails the exchange of the total rate of return of a bond market, or a segment within that market, for a money market rate. It could also involve the exchange of the returns of two bond markets. This swap allows investors to take an exposure to a bond market without having to hold or buy underlying bonds. Also, it is used to pass on bond market exposure to a third party without having to sell bond holdings. Investors can, as well, obtain tax advantages by entering into bond swaps especially in countries where financial institutions are exempt from withholding tax. These institutions can therefore pass on some of those tax advantages in the swap to foreign investors.
This swap is also known as a bond index swap.
