EMBA Module : Fixed Income Securities & Debt Markets

By : Bharat Parulekar, G Jaishanker, Narendra Somoshi Ranjit Bhanu Satej More

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What is STRIPS STRIPS (Separate Trading of Registered Interest and Principal of Securities) are distinct. Principal STRIP. where the single cash flow of the STRIP represents the principal cash flow of the original security . Coupon STRIPS. separate securities that are created from the cash flows of a Government securities and shall consist of – i. where the single cash flow of the STRIPS represents a coupon flow of the original security ii.

A facility to permit the reconstitution of securities within the STRIPS program was established. Reconstitution enabled the reassembly of a book-entry STRIPS security previously separated into its principal and interest components into a fully constituted security September 30. 1997: The notes and bonds eligible for stripping were expanded from 10-year notes and 30-year bonds to all notes and bonds. 2010. The STRIPS program was initiated for new Treasury securities that mature in 10 years or over and are maintained in the Federal Reserve book-entry system. RBI allows “stripping” of bonds from April 1.ORIGIN Country US Year 1960 Event Investment Dealers in the United States began (physically) clipping coupons from bearer government bonds and selling the individual pieces as separate securities. A notification was issued on Oct 16. 1985 1986 1997 India 2010 . 2009 providing terms and conditions for stripping/reconstitution of Government Securities.

How STRIPS Works? .

the return on strip bonds is fixed at the time of purchase  As substitute for guaranteed investment certificates and term deposits  STRIPS provides institutional investors with an addl. if interest rates do happen to fall  To match future obligations .  Surety on ROI at time of maturity  The option to realize a capital gain. instead of interest income.Why do investors buy STRIPS?  STRIPS are popular with investors who want to receive a known payment at a specific future date.  To reduce re-investment risk: Since there are no interest payments to be re-invested at future interest rates. Instrument for Asset Liability Mgt.

Mumbai. 2007 permits stripping & reconstitution of G-Secs. is permitted only in eligible G-Sec held in SGL/ CSGL accounts maintained at Public Debt Office. RBI. irrespective of the year of maturity shall be eligible for stripping/ reconstitution. STRIPS can only be held in demat form.  Stripping/reconstitution may be done at the option of the holder at any time from the date of issuance of a G-Sec till maturity.  RBI will not charge any fees for stripping/reconstitution of G-Secs .STRIPS in India Government Securities Act. 2006 & Government Securities Regulations. The salient features of guidelines issued by RBI in January 2010 are :  Stripping/reconstitution.  All dated G-Sec having coupon payment dates on January 2 and July 2.

1 Crs (FV) and multiples  STRIPS is reckoned as eligible G-Secs for SLR purposes and retain all the characteristics of G-Sec. It means the coupon and principal are reassembled into the original G-Sec.  To begin with. trade at a discount and are redeemed at FV. being zero coupon securities. STRIPS are tradable only in OTC market and such trades in STRIPS need to be reported on NDS for clearing and settlement through CCIL.  Reconstitution. allowed. . which is reverse of stripping. They will be eligible for market repo as well as repo under LAF of RBI.STRIPS in India  The minimum amount of securities for stripping shall be Rs.  STRIPS.

References:  http://www.stripbonds.info  http://nmimsbanking.org.com.amritpalsingh. CFP  http://www.figuide.com-blog  http://www.rbi.article by Chuck Rylant.in/scripts/FAQView .com  RBI Annual Report 2008-09  http://www.finweb.com/investing/  http://www.

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