Canadian Securities Course (CSC) Level 1 Practice Exam

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How is a strip bond created?

  1. By merging different bond types

  2. By separating individual coupons and bond residue

  3. By increasing the bond's face value

  4. By doubling the interest payments

The correct answer is: By separating individual coupons and bond residue

A strip bond is created by separating individual coupons and the bond residue. This process involves "stripping" the interest payments and the principal of a bond into individual securities, each representing a single coupon payment or the final face value payment at maturity. This allows investors to trade these components separately, providing more flexibility and customization in managing their fixed income investments. The other options are not correct because: A. By merging different bond types does not accurately describe how a strip bond is created. C. Increasing the bond's face value is not how strip bonds are created; instead, they involve splitting the bond into separate components. D. Doubling the interest payments is not part of the process of creating strip bonds.

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