Stripping the coupon off a bond and selling the bond at a discount?

Question

I think I remember my professor in college saying that investment banks and big traders take the coupons off of a bond and selling the bond at a discount price. can an individual investor as myself do this? Thanks

Answer 1

Yes, your professor is correct, this was done at one time when coupon bonds were issued and traded freely. And in the late 60's there were referred to as stripped bonds.

However, there are not that many coupon bonds out there and when the coupons are stripped off the bond, the value of the bond is reduced substantially, more than the value of the stripped off coupons.  And when selling the bond, it most be related to the buyer that the bond is being traded without coupons.

In theory, yes you can do it, in reality it would be very difficult since there are not that many coupon bonds.  When you strip the coupons, then submit them for payment you may have to submit proof of ownership.

The profit margin in selling a stripped bond is not that great, since they buyer knows that they are not going to receive any interest during the life of the bond nor at maturity.

A bond with the coupons stripped is not a zero coupon bond, its just a bond that was issued to pay interest only with the presentation of the coupons

There are no regulations preventing someone from cutting the coupons from a bond, then selling the bond

Answer 2

Thats basically what a zero coupon bond is.  But I dont think you can buy a bond and strip it yourself.

Answer 3

not unless you want to jump through a crapload of regulatory obstacles.