Can anybody explain in a very simple layman's language, what strip bonds are? Do they provide more return than GIC/Government bonds? Are there any risks involved?
The whole concept of stripping out mortgage interest is just beyond my grasp.
http://www.50plus.com/money/using-strip-bonds-in-your-rrsp/25044/
Does the above help? It is quite layman language.
Quote:
Originally posted by meghal
Can anybody explain in a very simple layman's language, what strip bonds are?
Quote:Not necessarily.
Do they provide more return than GIC/Government bonds?
Quote:Of course - the same risks as a regular bond, except for re-investment risk.
Are there any risks involved?
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"Mah deah, there is much more money to be made in the destruction of civilization than in building it up."
-- Rhett Butler in "Gone with the Wind"
I'm posting two examples here for you.
These are bond quotes in the secondary market.
The first screen is from a strip bond quote.
The second screen is from a regular bond quote.
The first column is the bond CUSIP Number, the second is the coupon rate, the third is the maturity date, the next is the asking price, the next is the YTM at the ask price.
The last column is the credit rating (DBRS in this case).
http://farm6.static.flickr.com/5137/5436363768_f7bb0ef75c_z.jpg" border="0" alt="http://farm6.static.flickr.com/5137/5436363768_f7bb0ef75c_z.jpg" />
Note that the coupon rate for the strip bonds is 0%.
Also note that the price is less than par (i.e. less than $100 a unit).
This is how the YTM is determined i.e. by buying below par and getting par value back upon maturity.
http://farm5.static.flickr.com/4081/5436363770_d05df81066_z.jpg" border="0" alt="http://farm5.static.flickr.com/4081/5436363770_d05df81066_z.jpg" />
On the other hand, note that in the regular bonds case, there is a coupon rate.
Also, the ask price is more than $100 per unit, inidicating that these bonds are selling at a premium to par.
These days, pretty much all investment grade bonds are selling at premium to par.
The % return in the YTM column takes into account the premium price.
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"Mah deah, there is much more money to be made in the destruction of civilization than in building it up."
-- Rhett Butler in "Gone with the Wind"
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