Investment in Separate Trading of Registered Interest and Principal of Securities (STRIPS)

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Dear Investor,

STRIPS (Separate Trading of Registered Interest and Principal of Securities) are instruments in which a fixed-coupon government bond is broken down ("stripped") into its separate cash flows: each coupon payment and the principal repayment become individual zero‐coupon securities.
For example, a government bond pays coupons every six months from the issue date, along with the principal at maturity. After the bond is stripped, each coupon is turned into a separate tradable instrument called a “Coupon STRIP,” while the principal is converted into another instrument known as the “Principal STRIP.”
The STRIPS carry only one cash flow (usually at maturity), they behave like zero‐coupon bonds: you buy them at a discount, and you receive the face value at maturity.

Features of Strips
  • Zero Coupon Bond: Each individual principal or interest payment is treated as a distinct zero-coupon bond. Strips are issued at a discount to their face value and redeemed at face value on the maturity without any periodic interest payments.
  • No Interest Payout: Since Strips securities behave like zero coupon bonds, there is no cashflow in the between in the form of coupons. You receive the face value amount at the maturity.
  • Underlying: STRIPS are created from the existing fixed coupons and tradable government securities (G-Secs) issued by both Central and State Government Securities (SGSs).
  • Face Value: The Face value of Treasury bills is same as other government securities i.e. Rs 100.00
  • Minimum Investment: The minimum investment in the STRIPS is Rs. 10,000 and can be purchased in multiple of 10,000
  • Tradability: STRIPS needs to be purchased from the secondary market as the same is not issued by the government through the primary market
  • Tax Implications: The annual accrued gain (difference between the discounted purchase price and face value at maturity) may be subject to tax according to accrual accounting methods, even if the cash is received only at maturity. However, we advise you to verify with your tax consultant related to tax implications on STRIPS if held until maturity, as well as the capital gains tax applicable if they are sold in the secondary market
 Practical Example & Simplified Illustration

Suppose there’s a Central Government bond that pays a coupon of 7.00 % semi-annually, maturity in 10 years, face value  of the security ₹100. The Holding of bond in F.V. is of Rs 1,00,00,000

In STRIPS:
  • Each semi-annual coupon of Rs 3,50,000 (calculated as 3.50% of Rs 1,00,00,000) is converted into a separate "Coupon STRIP," with maturity on each coupon date. In this case, there will be 20 Coupon STRIPs, each corresponding to one of the 20 semi-annual coupon payments.
  • The Rs 1,00,00,000 principal amount is converted into a "Principal STRIP," maturing at the end of the 10th year.’
  • Suppose you buy the Principal STRIP for ₹ 1,00,00,000  in face value at a price of Rs 49.00 today (just an illustration) that matures at 10 years,  your annual yield retrun is approx. 7.26% and your earn Rs 51,00,000  (Rs100-49) *(1,00,00,000/100).
  • Because you have locked in that payout, you don’t worry about reinvesting coupons, but you accept that you’ll only get money at maturity, and the price you pay is sensitive to rates.
Benefits of Strips
  • Guaranteed payout: You are certain of the amount and timing of your payout.
  • No risk of reinvestment: Since coupons are eliminated and you get a lump sum at maturity, you avoid the uncertainty of reinvesting coupon payments at unknown future rates
  • Safety: Since the underlying bond is a sovereign guaranteed instrument back by Central and State government, it is considered as the safest instrument.
  • Predictable Cash Flows:  STRIPS offer investors a fixed payment on a predetermined future date, making them excellent for meeting all the future obligations such as retirement or children’s education planning. Marriage etc.
  • Range of Maturities:  STRIPS securities are available currently with maturities ranging from as short as in the next 15 days to  as long as security maturing in the year 2074. This wide range of options allows investors to plan their future across various maturity timelines.
  • Secondary Market: Since STRIPS pay only at maturity but user still can exit the position in the secondary market by selling the security through Order Matching and RFQ (Request for Quote) module in the NDS OM Platform.  

Risk
  • High interest rate sensitivity: Because STRIPS have only one cash flow at maturity and no interim coupon, they are more sensitive to changes in interest rates. Small shifts in rates can cause large price volatility
  • Liquidity risk:  Strips security is less liquid in the secondary market compare to Coupon bearing Central government securities. Strips securities may have low trading volumes, higher bid‐ask spreads in the secondary market.
  • Implications for taxes: According to the accrual accounting method, the annual accrued gain in India may be subject to taxes even if you haven’t received it.

Tradability

Strips securities is tradable in secondary market

Who can Invest in STRIPS?

STRIPS can be invested by Individuals, Bank and Financial Institutions, Mutual Funds , Corporate, Provident and Pension Funds, Foreign Institutional Investors (FIIs) etc.

How to Invest in STRIPS ?

STRIPS can only be purchased from the secondary market as the Strips securities are not directly issued by the government.

Secondary Market

Investors can also directly purchase or sell the existing securities including Treasury bills from the secondary market using the NDS OM Platform web portal url https://retail.ndsom.com/#/login or through the Mobile app

The NDS OM platform (both web and Mobile app) is available for Retail investors to trade in secondary market in various government securities including STRIPS, Treasury bills and SGBs. 

All available STRIPS securities can be viewed by applying the "STRIPS" filter under the bond type section in the Security List under the  profile page of NDS OM Portal.

MOBILE APP NOW AVAILABLE FOR DOWNLOAD


NDS OM Retail

For any queries pertaining to investment in STRIPS  in  Secondary Market though NDS OM Platform  (Web and App), please contact our toll free number (1800 267 7955) for further assistance.



 

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