Understanding STRIP Bonds
Explanation:
A STRIP bond is a type of zero coupon bond where the coupons are stripped and sold as individual securities. One incorrect statement about STRIP bonds is that the yield to maturity on a STRIP is equal to its capital gain yield. The yield to maturity on a STRIP bond is actually equal to its coupon rate, not its capital gain yield.
The capital gain yield represents the potential gain or loss in the value of the STRIP bond over time. For example, if a STRIP bond has a coupon rate of 5%, then the yield to maturity would also be 5%, as it represents the annual interest rate the investor earns on the bond. The capital gain yield, on the other hand, would depend on the change in the market value of the bond relative to its purchase price.