Principal Strip Bond Definition

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A principal strip bond is the part of a principal government bond that has been separated from the interest rate part. Find out how a principal strip bond works like a zero coupon bond with help from a personal asset manager in this free video on the bond market and money management.

Part of the Video Series: Bond Market
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Video Transcript

Hello, I'm Roger Groh with Groh Asset Management. Today we're here to talk about innovations in Wall Street. One of which is taking a regular old bond, principally government bonds and actually separating the principal part of it from the interest rate part of it. The principal part of that bond is called a principal strip bond and once it's on it's own, it trades more like a zero coupon bond then the old interest bearing bond that it had been in the beginning. Why do it? Well different consumers want different products because after tax it's better off for them doing that. From the government's point of view, why do it? Well they probably hate it because it drives up their cost and adds a little bit more risk to the factor. But why do the brokerage firms do it? Well because the commissions that they make by separating the two and then selling them to individual customers increases the value of the components to more than it would be just in buying the regular old bond. So in the end, if you want to buy a zero coupon bond that is sold by the US government, you can buy a principal strip bond. You can get prices on them from the Wall Street Journal or Bloomberg.com or even your local newspaper. Thank you very much and I'm Roger Groh.

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