Strip Bonds

A Strip Coupon is created from a Federal, Provincial or Corporate bond owned by an investment dealer. The dealer separates or ‘strips’ the semi-annual coupons from the bond, transforming it into a series of coupons. These coupons have maturity dates corresponding with the original interest payment dates of the bond. Each coupon is sold separately at a discount from its face value, similar to a T-Bill. Since there are no interim payments, the coupons have the effect of compounding at a fixed rate, providing the investor with a guaranteed yield to maturity. Coupons carry the same credit rating as the bonds they are stripped from.

Price Volatility

The market price of a Strip bond is significantly more volatile than the price of a conventional interest-bearing debt security with the same credit risk and term to maturity. The primary reason for such volatility is that no interest is paid by a Strip bond prior to maturity. There is, therefore, no opportunity to reinvest interest payments at prevailing rates of interest prior to maturity. Without this reinvestment opportunity, the fluctuations in the market price of Strip bonds increase. The purchase price or present value of a Strip bond is determined by discounting the amount of the payment to be received on the payment date by the appropriate interest rate or yield factor.