By selling fixed-rate securities at the right time, investors can realize tax-free gains. Interest on a bond is paid annually at a fixed rate. The bond is redeemed at the end of its term. Price fluctuations during the term depend on supply and demand: If the general interest rate level rises, the price of existing bonds falls, making them less attractive to new investors. Conversely, the price and demand rise as interest rates fall. It also stands to reason that the longer the remaining term, the more volatile the price trend will be.

Taxation of securities is based on the annual interest rate in effect at the time the bond’s interest becomes due. Therefore, if the security is sold at a profit shortly before, during, or after its term, the accrued market or pro-rata interest is not taxable. At the same time, it is not particularly advantageous to purchase new bonds shortly before the interest payment date. Knowing this allows you to maximize your profit.