STRIPS in the Government Securities Market - Security Analysis and Investment Management

STRIPS is a process of stripping a conventional coupon bearing security into a number of zero coupon securities which can be traded separately. To illustrate, a 10-year government security can be stripped into a principal component and a set of 20 individual coupons /assuming half yearly coupon payments. Each of these 21 stripped securities can be treated as zero coupon bonds which can be traded at varying yields.

The conversion of one underlying security into a number of zero coupon securities called STRIPS increases the breadth of the debt market and provides a continuous market which ultimately helps in improving liquidity. The creation of securities of varied maturities from a single security satisfies the needs of different investors who have diverse risk profiles and investment horizons. STRIPS benefits not only investors, but also issuers. STRIPS allow the issuer to issue securities with long-term maturity for any amount. These long-term securities can be stripped to meet the market needs for short-term securities. Moreover, the supply of securities increases with stripping and this boosts the secondary market activity. Further, banks can issue STRIPS against the securities held by them. Thus, STRIPSfacilitates the management of the banks’ asset-liability mismatches.

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