From the course: Applied Fixed Income

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STRIPS investors and FRNs

STRIPS investors and FRNs

From the course: Applied Fixed Income

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STRIPS investors and FRNs

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- [Instructor] We look at the investor base for strips. Obviously the certainty of cash flow is the main reason for these investors to purchase strips or other strip securities. However, as I mentioned earlier, it's also important for tax planning purposes, as the increase in value of a tip accrues yearly in certain jurisdictions. It makes it attractive for tax deferred investments like retirement accounts. Additionally, because of this tax accrual, you may see strips that are purchased via mutual funds and ETFs, as these investment vehicles have to make distributions annually. There is also a segment of investors and arbitrages that look at mispricings between strips and the bond, to either strip them or reconstitute them in order to make riskless profit. The next fixed income products I want to talk about are floating rate notes. They're known as FRNs for short. As opposed to a fixed coupon bond, an FRN has a coupon that's reset periodically. These floating coupons are based on…

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