Coupon Stripping

What is 'Coupon Stripping'

Coupon stripping is 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.

BREAKING DOWN '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. Treasury STRIPS

    An acronym for 'separate trading of registered interest and principal ...
  2. Strip

    1. For bonds, the process of removing coupons from a bond and ...
  3. Zero-Coupon Bond

    A debt security that doesn't pay interest (a coupon) but is traded ...
  4. Strip Bond

    A bond where both the principal and regular coupon payments--which ...
  5. Bond

    A debt investment in which an investor loans money to an entity ...
  6. Interest Only (IO) Strips

    The interest portion of mortgage, Treasury or bond payments, ...
Related Articles
  1. Markets

    What are Treasury STRIPS?

    STRIPS is an acronym that stands for Separate Trading of Registered Interest and Principal Securities.
  2. Managing Wealth

    Introduction To STRIPS

    STRIPS provide an alternative form of bond for fixed-income investors who need definite cash flows at specific times. Read the article to find out how.
  3. Markets

    Using Excel PV Function to compute Bonds PV

    To determine the value of a bond today - for a fixed principal (par value) to be repaid in the future at any predetermined time - we can use an Excel spreadsheet.
  4. Markets

    How Does A Bond’s Coupon Interest Rate Affect Its Price?

    All bonds come with a coupon interest rate, which is the fixed annual interest a bond pays.
  5. Markets

    Comparing Yield To Maturity And The Coupon Rate

    Investors base investing decisions and strategies on yield to maturity more so than coupon rates.
  6. Markets

    How Do I Calculate Yield To Maturity Of A Zero Coupon Bond?

    Yield to maturity is a basic investing concept used by investors to compare bonds of different coupons and times until maturity.
  7. Managing Wealth

    How Are Zero-Coupon Municipal Bonds Taxed?

    What every investor needs to know about taxes and zero-coupon muni bonds.
  8. Markets

    Zero-Coupon Bond

    A zero-coupon bond or ‘no coupon’ bond is one that does not disburse regular interest payments. Instead, the investor buys the bond at a steep discount price; that is, at a price ...
  9. Investing

    What is a Premium Bond?

    A premium bond is one that trades above its face or nominal amount.
  10. Managing Wealth

    Risks To Consider Before Investing In Bonds

    Make sure you understand the risks associated with bonds before making an investment decision.
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 Answer >>
  2. What is the difference between a zero-coupon bond and a regular bond?

    The difference between a zero-coupon bond and a regular bond is that a zero-coupon bond does not pay coupons, or interest ... Read Answer >>
  3. How does an investor make money on a zero coupon bond?

    Learn about investing in zero-coupon bonds, exactly how they work as an investment vehicle, and their advantages and disadvantages ... Read Answer >>
  4. How does a bond's coupon rate affect its price?

    Find out how a bond's coupon rate influences its price, including the role of government-dictated interest rates and the ... Read Answer >>
  5. How does a bond's coupon interest rate affect its price?

    Find out why the difference between the coupon interest rate on a bond and prevailing market interest rates has a large impact ... Read Answer >>
  6. Why do interest rates tend to have an inverse relationship with bond prices?

    At first glance, the inverse relationship between interest rates and bond prices seems somewhat illogical, but upon closer ... Read Answer >>
Hot Definitions
  1. Frexit

    Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
  2. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  3. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  4. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  5. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  6. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
Trading Center