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Definition: STRIP Bond
Strip Bonds, also known as zero coupon bonds, are existing bonds which have been separated into their component parts i.e. a zero coupon bond and a series of coupon payments. These separate components are then made available to the investors as individual securities.
Based on the components in which an original bond is broken into, a Strip bond is of following two types:
Both types of securities are usually appropriate for individual investors. A bond basically consists of two components – Principal (face Value) and coupon (interest component). Face Value is the amount that the investor gets at maturity and coupons are the series of interest components that they receive during the life of the bond. Thus when a bond is stripped off it is broken into these two components. Hence P-STRIP represents the Principal component of a bond while C-STRIP represents the coupon component. The party investing in P-STRIP receives only the payment at maturity and the party investing in C-STRIP receives the fixed interest payment over the life of the bond.
STRIP bond prices depend on current interest levels and thus fluctuate from day to day. Thus difference between the discounted purchase value and stated maturity value gives the interest earned on the STRIP.