Zero Coupon Bonds - G-Sec STRIPS

Bonds
1

Can someone please share with me any resource where I can get a clear understanding of STRIPS and how they work? Also, any strategies of how to benefit from them? I understood that the Rs 100 bond is split into Rs 100 principal and x% coupon strips ( which are half yearly - for every year 2 coupon strips get created). Which one should a person buy a principal strip or a coupon strip? Also, in what environment? My guess is current environment is a great option to buy these since its high interest rate environment and it has zero reinvestment risk? I am asking from a retail investors perspective and I do not really wish to get a certain principal in a particular year in the future through this. My thesis is that in future when the interest rates fall, these zero coupon bonds will get affected the most (positively ofcourse) especially if they are really long term?

Last question - How can a retail investor buy G-Sec strips? Are they available on Zerodha?

2

They are as good as buying a zero coupon bond. The same logic of regular bonds applies in terms of how sensitive they are to interest rates.

STRIPs (both coupons or principal) are good for locking in interest rates. The advantage is they mitigate the reinvestment risk to an extenet.

Higher the duration, more the sensitivity to interst rates. The same logic applies.

They are listed but don’t trade actively. Check out goldenpi.com

3

Thanks for the response, How to find them on kite. Any pointers?

4

Isnt the reinvestment risk eliminated entirely? Am I missing something?

5

Do we have other zero coupon bonds as well apart from STRIPS with sovereign guarantee?

6

Do we have a debt fund that deals with only zero coupon bonds?

7

Please post all your questions in a single reply, makes it easy to answer.

Here are the symbols
https://www1.nseindia.com/content/circulars/CML48606.pdf

You still take reinvestment risk with subsequent investments, if any. Hence, not completely is what I was hinting at.

Nope.

Nope. DSP had used STRIPs in one of their FMP’s but I’m not a fan of FMPs.

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8

Thanks a lot for all the clarification. This really helped make my decision, I am planning to invest lumpsum in ZCBs. Can you please share your opinion about FMPs - I understand that it would have big interest rate risk and amount would be locked for long but apart from that Why are you not a fan ? Also, are FMPs same as Constant maturity funds or is there a difference?

1 Like
9

Zero coupon bonds are good for investors with patience and who are ready to sacrifice regular cash flows for capital appreciation