Strip Bonds

Strip bonds represent a category of fixed-income securities. A broker purchases a block of AAA bonds from a provincial or federal government and then separates a certain number of interest coupons from the certificates.

The strip bond and the strip of coupons are sold separately. Purchasers of strip bonds pay a discounted price, receive no interest and are repaid the par value at maturity.

This category of bonds is traded through certain groups of investment dealers or financial institutions that may maintain a market for these securities. However, since they are not obliged to do so, there can be no assurance that there will be a market for these particular securities if the holder wishes to dispose of them before maturity. Holders should therefore keep strip bonds until maturity so that they can realize the return.

Securities issued by larger provinces are more liquid than securities issued by smaller provinces.

Risk Level

Strip bonds are subject to the same risks as fixed-income securities as a result of interest-rate volatility, inflation, market growth, and new trading strategies.

However, the market price of a strip bond is considerably more volatile than that of an interest-paying bond. When interest rates increase, the price of a strip bond will trend more significantly downward than the price of an interest-paying bond. However, when interest rates fall, strip bond prices will trend more significantly upward. The fact that no interest is paid on this type of bond before its maturity is the primary reason for such volatility. Because of this, there is no way to reinvest interest payments at current interest rates before maturity.