What Are Strip Bonds?

What are Strip Bonds?  Typical bonds pay out both the principal investment amount, the face or par value, and also semi-annual interest, or coupon payments.  When these two forms are income are removed and separated from a bond the process results in strip bonds.  They are essentially stripped of their attributes and then resold in two separate parts.  Investors can buy either the coupon only or interest bond, or purchase the zero coupon bond which remains.  The coupon only bond will only pay the interest accrued from the bond as it ages towards maturity while.  Zero coupon bonds, the stripped bonds, will only payout the face value of the original bond once that stripped bonds maturity date passes.

Stripped Bonds In Practical Use

To many investors the idea of a stripped bond seems like a lesser investment, a bond missing a little bit of meat.  This however while true in that one does not enjoy all the benefits of a typical bond, leaves out many of the potential benefits when strip bonds are purchased.  Stripped bonds are safe havens with guaranteed payouts for one’s investments.  Always purchased at a discount of the par price, these bonds can be tucked away into a portfolio and hedge against fluctuating interest rates.  Meaning predictability in payout in an otherwise unpredictable market.  Strip bonds are also a reasonable investment from the standpoint of the investor looking for an interest only bond, called also simply a coupon bond.  In this investment method there is less money needed to buy in and if interest rates increase, one can see their profits from strip bonds increase exponentially.   In most countries only central banks can officially strip bonds into two parts, however there are exceptions.  Strip bonds are used in every major bond investing nation with Canada currently leading the pack in the total number of issued stripped bonds for a single country.

Related posts:

1. What Are Zero Coupon Bonds?
2. What Are Equity Bonds?
3. What Are Convertible Bonds?
4. What Is Bond Maturity?
5. What Are Callable Bonds?