G-SEC STRIPS let investors hold and trade the individual interest and principal components of eligible Government Treasury notes and Government Bonds as separate securities. Created by isolating each of the cash flows from a Government security.
Stripping is the process of separating a standard coupon-bearing bond into its individual coupon and principal components. For example, a 10 year coupon bearing bond can be stripped into 20 coupon and one principal instruments, all of which thenceforth would become zero coupon bonds.
Revised guidelines announced by RBI on May 3, 2018
All fixed rate, transferable, SLR eligible G-sec can now be STRIPped!
With G-STRIPS, investors can now get Zero Coupon Bond G-secs across the full maturity spectrum of G-secs issued by Government of India
A single cash flow from a STRIP means no coupons in between
No re-investment risk
Each G-STRIP to be priced as a ZCB.
Transactions take place at the yield (to 4 decimals) agreed by the buyer and the seller.
Price arrived at by discounting the single cash flow of the G-STRIP at the agreed yield. Price expressed as Discounted Value per Rs. 100 Face Value.
Let’s understand the pricing better with the help of an example.
The face value of a G-Strip Bond is Rs 1000. The bond bears a coupon rate of 9% with coupon payments being made at the end of each year. The maturity of the bond is 4 years. If the bond is redeemable at a premium of 11%. What would be the present market price of the bond?
|Years||Cash Flow||PV Factor @ 11%||PV of Cash Flow|
|1 to 4||90||3.102||279.22|
|Total Present Value||1009.6|
|Years||1 to 4||4|
|PV Factor @ 11%||3.102||0.658|
|PV of Cash Flow||279.22||730.38|
More secured than AAA Corporate Bond
Variety of tenure options available
Than FD and tax-adjusted AAA corporate bonds
Lowest Minimum investment starting at Rs 1000
Created by isolating each of the cash flows
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