Strip Bond
Obligation démembrée in French
Quick definition
A strip bond is a piece of a regular bond sold on its own: a single coupon payment or the final principal (the "residual"). You buy it at a discount, receive nothing along the way, and collect its full face value on one known date.
A bond taken apart
A regular bond is a bundle: a stream of coupon payments plus a large principal repayment at the end. Investment dealers can take that bundle apart, literally stripping the coupons from the principal and selling each piece separately. Each coupon becomes a small zero-coupon instrument paying on its date; the principal becomes the residual, paying its face value at maturity.
Every piece works the same way: you buy at a discount today and receive the full face amount on the payment date, with no cash in between. Your entire return is the gap between the price and the face value. Canadian dealers create strips mostly from Government of Canada and provincial bonds, so the credit quality is that of the underlying issuer.
Why investors use them
Strips shine when you know exactly when you will need a known amount of money: the year a child starts university, a retirement date, a planned home purchase. Buy a residual maturing that year and the amount arriving is fixed to the dollar, with no reinvestment guesswork, because there are no coupons to reinvest. A series of strips maturing in successive years, a cousin of the bond ladder, is a clean way to fund a string of known expenses.
The phantom income tax trap
Here is the catch, and it decides where strips belong. Even though a strip pays you nothing until maturity, the CRA treats the discount as interest that accrues every year. In a taxable account you must report and pay tax on each year's accrued amount, out of your own pocket, on income you have not received. This is known as phantom income.
The fix is simple: hold strips in registered accounts, where annual accrual does not matter. RRSPs, TFSAs, RESPs and RRIFs are all natural homes. A strip in a taxable account is almost never the right tool; the same strip in a registered account keeps the whole design intact.
Maximum volatility for their term
Because nothing is paid until the end, a strip has the longest possible bond duration for its term: a 12-year strip has a duration of about 12, versus roughly 9 for a typical 12-year coupon bond. Its price therefore swings harder than any coupon bond of the same maturity when rates move.
That volatility is only paper if you hold to maturity, which is how strips are meant to be used: the payoff on the maturity date is fixed no matter what prices did in between. Sell early, though, and you take whatever the market offers, which can sit far from a straight line to face value.
In Canada
Strips are a distinctly Canadian retail product, listed on dealer inventories under names like "coupons" and "residuals" with the issuer and payment date. They trade over the counter rather than on an exchange, and dealer markups can be wider than on regular bonds, so compare the implied yield against a regular bond of the same issuer and term before buying.
Worked example
A Government of Canada residual pays $10,000 in 12 years. At a yield of about 3.25%, it is priced near $6,800 today (approximate, convention math). You pay $6,800, receive nothing for 12 years, then collect $10,000: a locked-in $3,200 of growth if held to maturity.
In a TFSA, that $3,200 arrives entirely tax-free. In a taxable account, you would report accrued interest every single year, over $200 in the first year alone, without receiving a cent until maturity. Same bond, radically different outcome: the account choice is most of the decision.
Related terms
Reviewed by Alexandre Bernier, CFP®, CIM®, PFP®·Updated July 2026