Definition of Stripped bond

Stripped bond is a bond that has had its coupons removed by a broker dealer and it is selling at a deep discount to its principal payment in the future.

Applying "Stripped bond" to Securities Exams:

Broker dealers will purchase a large amount of long term government bonds and strip them of their coupons / interest payments. The striped bond now only represents a principal payment in the future. Broker dealers will then sell the principal payment in the future at a deep discount to investors who want to have a known amount on a set date.

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