Stripped Coupon

A stripped coupon refers to a small minimum trading unit of a larger security, where the principal amount and the interest payments have been separated and sold as individual zero-coupon securities.
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Definition of Stripped Coupon

A stripped coupon, sometimes referred to simply as a strip, pertains to a smaller segment of a larger security, typically bonds. In the context of U.S. Treasury securities, it commonly relates to Separately Traded Registered Interest and Principal Securities (STRIPS). These are debt securities where the interest payments (coupons) and the principal amounts are sold separately as zero-coupon securities.

Examples

  1. U.S. Treasury STRIPS: An investor buys the interest payments from a Treasury bond separately from the principal amount. The coupons and principal are sold individually, each becoming a zero-coupon security.

  2. Corporate Bonds: Similarly, corporate bonds can be stripped of their interest payments and principal, both parts trading independently in the secondary market.

Frequently Asked Questions

1. What are the benefits of investing in stripped coupons (STRIPS)?

Investors find STRIPS attractive due to their predictability in terms of payment since they are sold at a discount and mature at face value.

2. Can stripped coupons be sold before maturity?

Yes, stripped coupons can be traded in the secondary market before their maturity date, providing investors with liquidity.

3. How are STRIPS taxed?

While STRIPS do not pay interest periodically, the accrued interest (imputed interest) is nevertheless taxed annually.

  • Zero-Coupon Bond: A bond that does not pay periodic interest. It is sold at a discount to its face value and provides a return at maturity when the full face value is paid.

  • Coupon Bond: A bond that pays regular interest payments, known as coupons, to the bondholder until maturity, when the face value is also repaid.

  • Principal-Only (PO) Strip: A type of strip where only the bond’s principal repayment section is available for trading.

  • Interest-Only (IO) Strip: Refers to securities where only the bond’s regular coupon payments are sold independently from the principal repayment.

Online References

Suggested Books for Further Studies

  1. “Fixed Income Securities: Tools for Today’s Markets” by Bruce Tuckman and Angel Serrat
  2. “Bond Markets, Analysis, and Strategies” by Frank J. Fabozzi
  3. “The Handbook of Fixed Income Securities” by Frank J. Fabozzi
  4. “Bond and Money Markets: Strategy, Trading, Analysis” by Moorad Choudhry

Fundamentals of Stripped Coupon: Fixed Income Basics Quiz

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Thank you for exploring the fundamentals of stripped coupons and enhancing your financial knowledge. Stay curious and informed!

STRIPS
Strip Development