Loan relationships: special types of security: gilt-edge securities: gilt strips
What are gilt strips?
Strips involve the separation of the interest ‘coupons’ from the underlying principal on which the interest is payable. Certain gilts (and other securities) are strippable in this way. The holder can surrender the gilt to the Bank of England, receiving in return a number of gilt strips, each of which is treated as a gilt in its own right. Each strip is simply a right to receive a payment at a future date. It carries no interest and therefore is like a zero coupon bond. Anyone buying a gilt strip would pay less than the redemption amount; how much less would depend on the period from purchase to redemption.
Gilt strips are independently tradeable, like other free-standing securities. Where a collection of strips has the same maturity date it can be reconstituted to form a single gilt.
A 10-year gilt paying interest every 6 months is stripped into 21 ‘stripped’ gilts - one for each interest period plus the principal. This is done by surrendering the original gilt in exchange for 21 new gilt strips.
The strip that represents the right to the first interest payment is worth more than the strip representing the right to the last interest payment. The value of the strip that represents the right to repayment of the principal depends on the amount to be repaid and the period of time to redemption