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Hi all,Could someone spare some time explaining to me what a "stripped convertible bond" is? In general, the term "stripped", what does it mean? Maybe some examples?Thanks a lot in advance,Micha

QuoteOriginally posted by: Miesje In general, the term "stripped", what does it mean?a coupon bond is something that makes periodic payments (usually every 6 months or every year) for a set length of time and when the bond matures, the principal is returned.With a semiannual 5 year bond with an 8% coupon and principal of $100, you receive $4 every 6 months and get $100 at the end of 5 years.A zero coupon bond has no coupons so only has one payment at the maturity of the bond.When you strip a coupon bond, you basically sell each coupon and the principal payment separately as a zero coupon bond.

a stripped convertible probably refers to an ancient practise, last seen in the previous millennium.back then, a convertible bond price would be relatively cheap compared to the equivalent hedging basket of derivatives.for example, if a convertible was cheap, you might buy the CB and sell a call option that closely mimics the embedded optionality in the CB, you might buy a CDS contract to hedge the default risk of the issuer, and you would of course overall neutralise your total position with respect to stock price and interest rate moves.another possibility is to sell on the "convertible bond asset swap" in which you sell the bond to someone else and add in an interest rate swap, effectively swapping the bond over to LIBOR + spread, but retain the right to call back the structure at a spread over LIBOR. In this way you retain the equity optionality, and the other guy has a callable floating rate note and ets paid for the CB credit risk he is taking.As applied to CBs the term is unlikely to mean anything like the "strip" in "treasury strips" I would think, which is what ppauper was referring to.

QuoteOriginally posted by: erstwhileAs applied to CBs the term is unlikely to mean anything like the "strip" in "treasury strips" I would think, which is what ppauper was referring to.I answered the questionQuoteIn general, the term "stripped", what does it mean?