Canadian Securities Course (CSC) Level 1 Practice Exam

How is a strip bond different from a regular bond?

1. It offers higher coupon rates

2. It matures faster

3. It compounds to par value at maturity

4. It has adjustable interest rates

The correct answer is: It compounds to par value at maturity

A strip bond, also known as a zero-coupon bond, is indeed characterized by the way it is structured in comparison to a regular bond. The primary distinction is that a strip bond does not pay periodic interest (coupons) like regular bonds. Instead, it is issued at a discount to its par value and matures at that par value. This means that the difference between the purchase price and the par value at maturity represents the interest earned over the life of the bond, effectively compounding to that par value. The characteristic of compounding to par value at maturity is foundational to the nature of strip bonds, as they accumulate value over time without making intermediate interest payments. This structure makes them unique compared to regular bonds that provide periodic coupon payments throughout their duration.