Coupon Stripping

AAA

DEFINITION of 'Coupon Stripping'

The separation of a bond's periodic interest payments from its principal repayment obligation to create a series of individual securities. In coupon stripping, the underlying bond becomes a zero-coupon bond and each interest payment becomes a separate zero-coupon bond. Each bond will sell at a different discount to face value based on its time to maturity.

INVESTOPEDIA EXPLAINS 'Coupon Stripping'

If an investment bank held a $50 million Treasury bond that paid 5% interest annually for five years, coupon stripping would turn that bond into six new zero-coupon bonds: one $50 million bond that matured in five years and five $2.5 million bonds that would each mature in one of the coming five years. Coupon stripping can also divide up a larger bond with a particular interest rate into a series of smaller bonds with different interest rates to satisfy investors' demands for particular types of bonds. This practice is seen in the mortgage-backed security market.

RELATED TERMS
  1. Coupon

    The interest rate stated on a bond when it's issued. The coupon ...
  2. Current Coupon Bond

    A bond with a coupon rate that is within 0.5\% of the current ...
  3. Coupon Bond

    A debt obligation with coupons attached that represent semiannual ...
  4. Mortgage-Backed Security (MBS)

    A type of asset-backed security that is secured by a mortgage ...
  5. Zero-Coupon Bond

    A debt security that doesn't pay interest (a coupon) but is traded ...
  6. Coupon Pass

    The purchase of treasury notes or bonds from dealers, by the ...
RELATED FAQS
  1. What is a stripped bond?

    The quick answer to this question is that a stripped bond is a bond that has had its main components broken up into a zero-coupon ... Read Full Answer >>
  2. What are some examples of smart beta ETFs that use passive and active management?

    There are a number of smart beta exchange-traded funds (ETFs) that use passive and active management, including the WisdomTree ... Read Full Answer >>
  3. How does implied volatility impact the pricing of options?

    Implied volatility is an important aspect of the time value premium of an option. As implied volatility increases, call and ... Read Full Answer >>
  4. Which federal regulatory agencies approved and are now responsible for enforcing ...

    Five federal regulatory agencies approved and are jointly responsible for enforcing the Volcker rule. These agencies include ... Read Full Answer >>
  5. How are commodity spot prices different than futures prices?

    Commodity spot prices and futures prices are different quotes for different types of contracts. The spot price is the current ... Read Full Answer >>
  6. Does the Volcker Rule prevent commercial banks from offering shares of hedge funds ...

    The Volcker Rule does not prevent commercial banks from offering trading services in hedge or private equity funds to their ... Read Full Answer >>
Related Articles
  1. Bonds & Fixed Income

    Bond Call Features: Don't Get Caught Off Guard

    Learn why early redemption occurs and how to avoid potential losses.
  2. Bonds & Fixed Income

    How Bond Market Pricing Works

    Learn the basic rules that govern how bond prices are determined.
  3. Bonds & Fixed Income

    5 Basic Things To Know About Bonds

    Learn these basic terms to breakdown this seemingly complex investment area.
  4. Forex Education

    How To Compare Yields On Different Bonds

    Find out how to equalize and compare fixed-income investments with different yield conventions.
  5. Options & Futures

    Top 4 Strategies For Managing A Bond Portfolio

    Find out how these strategies work and how you can put them to work for you.
  6. Options & Futures

    Common Bond-Buying Mistakes

    Avoid these errors made daily in bond portfolios everywhere.
  7. Credit & Loans

    What is a Syndicated Loan?

    A syndicated loan is one that involves a group of lenders (called the syndicate) who pool their lending resources to make a loan.
  8. Investing Basics

    What is an Asset-Backed Security?

    An asset-backed security (ABS) is a debt security collateralized by a pool of assets.
  9. Taxes

    What is an Ad Valorem Tax?

    An ad valorem tax is a levy placed on real or personal property based on the assessed value of that property.
  10. Professionals

    Top ETFs, Mutual Funds for Investing in Water

    The nation's water supply is declining as demand is increasing. This presents an investment opportunity, just mind your liquidity.

You May Also Like

Hot Definitions
  1. Multicurrency Note Facility

    A credit facility that finances short- to medium-term Euro notes. Multicurrency note facilities are denominated in many currencies. ...
  2. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
  3. Treasury Yield

    The return on investment, expressed as a percentage, on the debt obligations of the U.S. government. Treasuries are considered ...
  4. Bund

    A bond issued by Germany's federal government, or the German word for "bond." Bunds are the German equivalent of U.S. Treasury ...
  5. European Central Bank - ECB

    The central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed ...
  6. Quantitative Easing

    An unconventional monetary policy in which a central bank purchases private sector financial assets in order to lower interest ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!