Stripping
Stripping is a financial strategy where an investor buys a bond and separates its interest payments (coupons) and principal components to be sold separately as securities.
Example #1
For example, an investor purchases a bond with a face value of $1,000 and an annual interest payment of $50. The investor can then split the bond into two securities: one representing the $50 annual interest payment and the other the remaining principal.
Example #2
The interest payment security can be sold to income-seeking investors, while the principal security can be sold to investors looking for long-term gains.
Misuse
Misuse of stripping can happen when investors use this strategy in deceptive ways to manipulate the market. For instance, if an investor intentionally spreads false information about the value of the securities derived from stripping to artificially inflate their prices, this could harm other investors and market integrity. It's crucial to regulate and monitor such activities to ensure fair market practices.
Benefits
One significant benefit of stripping is that it allows investors to tailor their investments to meet specific financial goals. By separating the interest payments and principal of a bond and selling them individually, investors can create customized investment products that cater to different risk appetites and income needs.
Conclusion
Stripping, when used ethically and transparently, can offer investors flexibility and diversification within their investment portfolios. However, it's essential to guard against misuse and ensure that market manipulation or deceptive practices are prevented to protect the interests of consumers and maintain market fairness.