STRIPS stands for Separate Trading of Registered Interest and Principal of Securities. The inception of STRIPS was created to provide investors an alternative in fixed-income securities that could help investors in their investment objectives which might be difficult to achieve using traditional bonds.

STRIP bond differs from the traditional bonds wherein the principal amount gets separated from the interest of that bond.

The STRIPS program was formed in 1985 by the U.S Treasury.

STRIPS bonds are also known as zero-coupon bonds. These bonds do not bear the re-investment risk since no payments are done before the maturity of the bond.

Simply, it is a debt obligation whose interest payments and the principal payment are removed by the dealers of the bond and sold separately to other investors.

Investors buying these removed or separated principal amounts of the bond are called a residue that receives a value equivalent to the face value of the bond when it matures.

STRIPS are created when a financial institution purchases a T-bond or T-note and then extracts each interest and principal payment separately as new security ultimately selling them as zero-coupon bonds.

For example, a seven-year T-note will have 14 interest payments associated with one principal payment. These interest payments and principal payments together as 15 STRIPS are sold by the financial institution at a deep discount to its face value. For instance, an Rs.500 interest payment is sold at Rs.200 ultimately reaching the value of Rs. 500.

These securities can be an excellent type of investment arena for the risk-averse investors who are concerned with a consistent stream of income or who need specific payments on specific future dates.

STRIPS are associated with interest rate risks i.e when the interest rate prevailing in the market rises then the STRIPS prices fall and vice versa.

Changes in inflation expectations or the uncertainty in the inflation affect STRIPS prices.

Interest earned is taxable and it should be mandatorily reported until STRIPS mature or are sold.

However, before investing it is crucial to define the objective behind an investment as well as equally important to identify your risk appetite. Bondskart has a team of experts that guides you through different bonds investment horizons as well as helps you with different investment decisions. Through Bondskart you can conveniently explore and make your bond investments.