stripped bond
Stripped Bond: a bond that has been split into its interest payments and its final lump sum, so each piece is sold on its own as a separate investment.
In plain English
Why would anyone want to buy just a piece of a bond instead of the whole thing?
That question is really the whole idea behind a stripped bond. Normally, a bond is one package. You lend someone money, say the Nigerian government or a big UK company, and they promise to pay you small interest amounts every so often, then hand back the full amount you lent at the end. A stripped bond takes that one package and separates it into pieces. The regular interest payments become their own little investments, and the final lump sum, called the principal, becomes another investment on its own. Each piece is then sold separately to different buyers.
Think about a Nigerian parent planning for a child's university fees in eight years. They are not interested in small interest trickling in every few months, they want one solid amount waiting on a specific date. A stripped bond built around just that final principal payment suits them perfectly. They buy it today at a lower price than its future value, and on maturity date, they receive the full amount, no interest cheques to manage in between.
In the UK, some retirees do the opposite. They want steady income now, not a lump sum later, so they buy the interest only strips from several bonds and stack them to arrive one after another, almost like a homemade pension drip feed.
For someone abroad sending money home for a long term family project, a stripped bond bought in a stable currency can be a way to lock in a known amount landing on a known date, without worrying about interest payments getting lost in transfer fees along the way.
A ₦1,000,000 bond due in five years is split into two strips. One person buys the strip covering the interest payments over those five years. Another buys the strip covering the ₦1,000,000 due at the end, paying maybe ₦750,000 today because they are essentially buying it at a discount and waiting for it to grow to the full amount.
Questions people ask
Why would a bond be split up like this at all?
Because different investors want different things. Some want steady income, some want one guaranteed amount on a future date, and stripping the bond lets each group buy exactly the piece that suits their plan.
Is a stripped bond riskier than a normal bond?
Not riskier in terms of who owes the money, but the value of each strip can swing more with interest rate changes since there is only one payment or one stream to consider, so prices can move more sharply than a full bond.
Can an ordinary Nigerian investor buy a stripped bond?
It depends on the market, since strips are usually created and sold through banks or bond dealers, so access is more common through investment platforms or advisers rather than buying directly like shares on the stock exchange.
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