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.

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  1. What is a stripped bond?

    A stripped bond is a bond that has had its main components broken up into a zero-coupon bond and a series of coupons. Read Answer >>
  2. What is the difference between a zero-coupon bond and a regular bond?

    A zero-coupon bond does not pay coupons or interest payments like a typical bond does; instead, a zero-coupon holder receives ... Read Answer >>
  3. 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 >>
  4. When is a bond's coupon rate and yield to maturity the same?

    Find out when a bond's yield to maturity is equal to its coupon rate, and learn about the components of bonds and how they ... Read Answer >>
  5. Why do bond coupon rates vary so greatly?

    Learn about the two major reasons that cause bond coupon rates to vary so dramatically and what role coupons play in the ... Read Answer >>
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