STRIPS (Separate Trading of Registered Interest and Principal of Securities) are separate securities that are created by isolating the cash flows of a Government security into tradable zero-coupon securities, which will usually trade in the market at a discount and are redeemed at face value.
STRIPS were introduced with an intention to provide investment options across the full maturity spectrum for investors. The original guidelines for STRIPS were introduced by the RBI w.e.f 1st April, 2010 which were later revised on May 3, 2018 where all fixed rate, transferable, SLR eligible G-sec were allowed as STRIPS.
How are the STRIPS created?
A Bond is given to the RBI for stripping and the RBI gives back the strips of that particular constituent. For eg: If we give a 10 year bond to RBI, RBI will give back 21 different Strips/ISIN/ Securities to the constituent.
Types of STRIPS:
(i) Coupon STRIPS: where the single cash flow of the STRIPS represents a coupon flow of the original security
(ii) Principal STRIPS: where the single cash flow of the STRIPS represents the principal cash flow of the original security.
Example: Assume that in 2018, Stripping Rs. 100 Cr Face Value of G-sec 8.15% produces remaining 9 semi-annual Coupon STRIPS each maturing on their respective coupon payment dates and 1 Principal STRIP maturing on 11 June 2022
And the last strip on 11th June, 2022 will be the Principal STRIP worth 100 cr.
Example source: ICICI Sec.
How will they be represented?
Multiple Coupon STRIPS represents each coupon flow having a different ISIN in the format of GSDDMONYYYYC with GS = Government Security , DDMONYYYY = Date of STRIP maturity (Coupon date) and C = Coupon STRIP.
One Principal STRIP represents the principal flow of the original security having a distinctISIN in the format of GSDDMONYYYYP with GS = Government Security , DDMONYYYY = Date of STRIP maturity (Coupon date) and P = Principal STRIP.
How will they be priced?
Each individual STRIP will be priced as a ZCB (Zero Coupon Bond) g-sec. The transaction price of each such STRIP can be arrived at by discounting the cash flow of a particular maturity (either Coupon or Principal flow) with the agreed ZC yield for that maturity.
Treatment and Trading + Settlement:
STRIPS are treated as eligible Government Securities for SLR purposes and retain all the characteristics of Government Security and are traded and settled accordingly.
Key features:
-
Reinvestment risk is mitigated to a large extent as Investors can upfront know what exactly they pay and what exactly is the maturity amount and on what date. There is no uncertainty associated as to what rate can be obtained on reinvestment of coupons at future dates which is a major issue with coupon bearing bonds.
-
investors can now get ZCB G-secs across the full maturity spectrum of G-secs issued by Government of India
-
One can choose the tenor and invest only in those STRIPs
How to invest ?
Currently, they are listed but there’s no liquidity. We are working on alternate ways to make them available. We will keep you posted.