A strip bond is a type of fixed income security in which the coupon payments are separated from the principal, or "face value", of the bond and are sold as separate securities. The principal and interest payments are then made to the holders of the separate securities at maturity.
Strip bonds are also known as "zeros", "strips", "separately traded principal and interest securities" (STPI), or "accrual bonds".
How does a strip bond work? A strip bond is a fixed income security that has had its coupons and principal payments removed, or "stripped," and sold separately as zero-coupon bonds. The stripped bond is then referred to as the "stripped bond principal," or "principal only" (PO), while the stripped coupons are called "strips."
Stripping can be done manually by the investor, or it can be done by the issuer through a process called "auto-stripping." Manual stripping requires the investor to physically remove the coupons from the bond and then sell them separately. Auto-stripping is a service that some issuers provide, which allows investors to purchase bonds that have already had their coupons removed.
The advantage of strips is that they can be bought and sold separately, which gives investors more flexibility in terms of when they receive their interest payments. For example, an investor could buy a strip bond and then sell the strips immediately, which would result in receiving the interest payments immediately. Or, an investor could buy a strip bond and hold onto the strips until the bond matures, at which point they would receive the entire principal amount.
The disadvantage of strips is that they are less liquid than traditional bonds, and they also typically have a higher yield than traditional bonds because there is more risk associated with them. For example, if interest rates rise, the price of a strip bond will typically fall more than the price of a traditional bond. How do you calculate yield on a strip bond? In order to calculate the yield on a strip bond, you need to first determine the price of the bond. The price of the bond is determined by the interest rate, the face value of the bond, and the time to maturity. Once you have determined the price of the bond, you can then calculate the yield to maturity.
The yield to maturity is the rate of return that you would earn if you held the bond until it matured and then reinvested the proceeds at the same interest rate. In order to calculate the yield to maturity, you need to know the price of the bond, the face value of the bond, and the time to maturity.
Once you have determined the price of the bond and the yield to maturity, you can then calculate the yield on the bond. The yield on the bond is the rate of return that you would earn if you held the bond for one year and then reinvested the proceeds at the same interest rate. In order to calculate the yield on the bond, you need to know the price of the bond, the face value of the bond, the time to maturity, and the yield to maturity. What does stripping mean in finance? In finance, stripping refers to the separating of a financial instrument into its component parts so that each part can be traded separately. For example, a bond can be stripped into its interest payments (coupons) and its principal (the face value of the bond). This can be done with other types of securities as well, such as mortgages.
Why would you strip a bond? The primary reason to strip a bond is to create a higher yielding investment. When you strip a bond, you are essentially breaking it up into its component parts and selling them separately. The individual parts (the coupons and the principal) will have different yields, and by selling them separately, you can earn a higher overall yield than if you held the bond to maturity.
Another reason to strip a bond is to hedge your interest rate risk. If you believe that interest rates are going to rise, stripping a bond can help protect you from losses. By selling the individual parts of the bond, you are effectively shortening the duration of your investment. This will help to insulate you from interest rate risk.
What are the different types of bonds? There are four main types of bonds: government bonds, corporate bonds, municipal bonds, and treasury bonds.
Government bonds are issued by national governments and offer a guaranteed rate of return. Corporate bonds are issued by companies and offer a higher rate of return than government bonds, but are considered to be more risky. Municipal bonds are issued by state and local governments and offer a tax-exempt rate of return. Treasury bonds are issued by the federal government and offer a guaranteed rate of return.