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Bond Substitution Swap

A bond swap that entails swapping substitute bond issues experiencing short-term imbalances in yield spreads. The imbalance will correct itself in the near future by having the yield on the proposed bond (purchased bond) drop to the level of the substituted (held) bond. For example, an investor holding a 10-year, 6% bond (yield = 6%) may be able to substitute it with an otherwise identical bond (but yield = 6.1%), taking advantage of the mispricing situation.


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