Strip bonds

Strip bonds 

Created by the dealer acquisition of existing high-quality bonds block, and then the physical separation of certain personal interest coupons from the underlying bond residue. Then, these two units were sold 

at a significant discount to their face values ​​are as follows: 

Hosting coupons, including separation outdated future coupon issue date of the call. 

Bond residues, including principal plus interest is not independent semi-annual, between the date of redemption of coupons and bonds due date. 

Strip bond holders receive no interest payments. Instead, buy bonds at a discount price, which will result in a certain compounded rate of return. Given a specified interest rate and maturity, present value factor table can be used to determine an appropriate price. 

For example, if investors wish to receive a coupon maturing in six denominations of $ 3,000 a compound rate of return of 12%, she will pay $ 0.507 per $ 1.00 face value, or (0.507 said 3,000) 1521 dollars. Abandon regular cash flow, providing semi-annual interest payments in return, investors locked in compounded rate of return. Compounding investment can have a significant effect: In our example, the investor will double her investment is only 6 years. 

Most of the sales of the two components of the strip bond institutional investors, such as pension funds and individual registered savings plan. Securities regulatory authorities are not familiar with these tools of public concern - especially fears of bonds and other traditional forms of guaranteed investment certificates (GIC) and government securities and other financial products, public confusion. 

Not familiar with this, it may lead investors do not realize that some important investment properties. 

These properties include: 

- Income Tax Law "as a benefit" specified discount (ie purchase price and the difference between the amount due and payable), part of which must be reported as regular income. 

- Strip the dealer or excessive OTC market, bond trading, is the most conventional debt securities situation. Can not guarantee that at any given time, especially with the bond market will be. In this case, the buyer may hold their bonds to maturity strip to realize their investment. Strip bond market price significantly more than conventional interest-bearing debt securities of the same maturity risk and price volatility. This is mainly due to fluctuations in strip bonds before maturity fact that no interest is paid. So there is no chance before maturity at prevailing rates of interest paid reinvested. If there is no re-investment opportunities, strip bonds increased market price fluctuations. 

- The buyer can take three forms: strip bonds delivered 

1. The effective interest coupons or residues (in-kind); 

2. Deposit receipt or receipts or certificates representing one or more separate relevant coupons or held by the Custodian residual (usually a receipt) certificate issued by a custodian; 

3. Deposit receipt or certificate issued by a receipt or proof of which have expressed interest in a pool of coupons held by the Custodian or the residual (usually a receipt) by the Custodian. 

Should be held in a safe place to buy physical zone bonds and may be difficult to replace if lost, stolen or destroyed, because they are anonymous. 

Usually receipt holder is entitled to take the relevant coupons or residues delivery.

Usually held by non-receipt may be entitled to take the relevant coupon or residual maturity before delivery. Deposit receipt or certificate holder may be restricted in their debt instruments directly enforce the terms of the rights of the issuer. 

In addition, usually non-receipt holders may have their rights under the applicable custodial agreement by qualified majority of the holders at a meeting called for that purpose. The buyer should review the arrangements for imprisonment and his rights under. 

These concerns led to the rules of exchange rules, which give the initial purchase zero-coupon or strip bonds, a special procurement circular or information statements must be approved by Director of the Commission. 

The circular must address four key points: price fluctuations, tax effects, the extent of the secondary market, as well as strip bonds and bearer securities custody arrangements. In addition, if the seller is not registered with the Commission, the buyer must acknowledge receipt of the Circular. Registered sellers who simply forwards the circular to the purchaser and sales confirmation....