Coupon Stripping

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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. Current Coupon Bond

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

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

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

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

    The interest rate stated on a bond when it's issued. The coupon ...
  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 >>
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