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What are gilt strips?

Strips involve the separation of the interest ‘couponsâ€� from the underlying principal on which the interest is payable. Certain gilts (and other securities) are strippable in this way. »Ê¹ÚÌåÓýapp 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.

Example

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.

»Ê¹ÚÌåÓýapp strip that represents the right to the first interest payment is worth more than the strip representing the right to the last interest payment. »Ê¹ÚÌåÓýapp 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