What are STRIPS bonds?

STRIPS refers to Separate Trading of Registered Interest and Principal Securities. A STRIP bond is a debt instrument in which the principal amount and coupon payments are sold separately. For instance, a two-year bond with a semi-annual coupon will give five cash flows, which will be four interest payments and one principal payment. Therefore, such a bond can be stripped into five different securities and sold. Investors can buy, hold, sell, and redeem STRIPS only via financial institution, broker, or dealer who handles government securities (G-Sec). G-sec STRIPs market is slowly developing and have low traded volume, as per money market dealers.