Canadian Securities Course (CSC) Level 1 Practice Exam

What is the primary feature of a strip bond?

1. Receiving no interest payments

2. A fixed interest rate

3. A long maturity period

4. Redemption at a premium price

The correct answer is: Receiving no interest payments

The primary feature of a strip bond is that it is issued without periodic interest payments. Instead of receiving regular interest, the investor buys the bond at a discount and receives a single lump-sum payment at maturity, which includes the bond's face value. This structure makes strip bonds appealing for investors who are looking for a straightforward investment that provides a predictable return at the end of the term. While a fixed interest rate is relevant to many bond types, strip bonds do not offer traditional interest payments, distinguishing them from other fixed-income instruments. Similarly, strip bonds can have varying maturity periods, so a long maturity is not a defining characteristic. Lastly, redemption at a premium price is not associated with strip bonds, as they are redeemed at their face value, not at an inflated price. Thus, the absence of interest payments distinctly identifies strip bonds as their primary feature.