Stripped coupons are coupons that have been detached from the principal portion of a bond. A bondholder may decide to detach the coupon to create two distinct products: the principal portion (or residual) and the interest coupons.
Finding the market value of a stripped coupon
The value of stripped coupons can be found like that of a provincial or municipal bond. Because they are traded on the secondary market, the price shown reflects the current market value.
The different types of stripped coupons
Stripped coupons are created from government (federal, provincial or municipal) or corporate bonds. Therefore, their yield depends on the issuer.
The benefits of stripped coupons
The main benefit of stripped coupons is that the yield at maturity is known at the time of purchase. You therefore know the amount you will receive at maturity, i.e., the coupon’s nominal value.
Risks associated with stripped coupons
The main risk associated with stripped coupons is the issuer’s default. It is therefore important to know the credit rating assigned to the issuer before purchasing this product.
Interest rates also play an important role in determining your return. Variations can indeed affect the coupon price, even more than it would bonds, because you do not receive interest payments during the term of the coupon. It is therefore important to be able to accurately predict potential interest rate movements over time to determine if the coupon you want to purchase is appropriate for your situation.
Finding the right coupon for your situation
When investing in a coupon, the most important factor is the amount that you pay at purchase since you will only receive the coupon’s nominal value at maturity. A positive market performance or economic backdrop has nothing to do with your investment – at least, at maturity.
Borrowing to purchase stripped coupons
You can use a margin account to purchase stripped coupons.
To learn more about margin accounts, please visit our dedicated brokerage account page.
Trading stripped coupons
With your National Bank Direct Brokerage account, it’s easy to trade stripped coupons online.
- First, click on Transactions – Fixed Income Securities and a transaction page will open.
- Then, specify the investment amount and click on the rate you wish to obtain.
- you’ve found the product you want, simply click “Trade” and a transaction page will open.
- Verify the information to make sure you haven’t made any mistake, and click “Confirm”.
Once your order has been submitted, you may view it under Transactions – Current Orders and Instructions.