Principal-Only Strips - PO

See: Principal.

Not nearly as sexy and kind of weird as it sounds. A strip refers to the dual stripping of a bond’s principal from its stream of interest payments.

The Enemizer, maker of the highest volume digestive aids on the planet, needs to borrow $40 million for a plug and tubing extrusion factory. It will pay 8% a year interest, or $3.2 million a year for 10 years, after which time it promises to pay back the $40 million it has borrowed.

So there are 2 “streams” here. One is the stream of 10 interest payments of $3.2 million each, or a total of $32 million over a decade. (Discounting back that number, it’s worth a lot less than $32 million today). Then it has a final payment of $40 million in 10 years. And yeah, it’s not really a stream. More like a blop. Or splash, or something. Those 2 entities can be stripped such that a principal-only strip is discounted-to-match-risk-and-opportunity-cost-and-expected-inflation-and-other-stuff. And investors then pay, say, $27.33 million today for that payout of $40 million in 10 years.

Can the payout be diced into pieces? Sure. Like...what about 10 payments of $4 million each year? Great. That stream would be worth more to current investors. Lots of ways to enemize the cat. Or skin it. Or whatever.