Legal Definitions - strip

The term "strip" has a specific meaning in finance and another in property law, and also refers to an acronym.

• STRIP stands for Separate Trading of Registered Interest and Principal of Securities. This refers to a financial practice where the individual interest payments (known as coupons) and the final principal repayment of a bond are separated and sold as distinct, individual securities.

Strip (Financial Context)

In finance, "strip" refers to the act of separating a bond's future interest payments (coupons) and its principal repayment into individual components, which are then sold separately as new, distinct securities.

• Example 1: An investment bank purchases a long-term U.S. Treasury bond. Instead of holding the entire bond, the bank decides to "strip" it. They sell the right to receive each annual interest payment to different investors who want a steady income stream, and they sell the right to receive the bond's face value at maturity to other investors who are looking for a lump-sum payment in the future.

  Explanation: This illustrates "strip" because the bank has unbundled the original bond into its constituent parts—the individual interest payments and the principal—and created separate, tradable financial products from them.

• Example 2: A large pension fund needs to ensure it has specific cash flows available to pay out benefits in 5, 10, and 15 years. They might purchase "stripped" principal payments from various government bonds that mature on those exact dates, effectively buying only the future principal repayments without the associated interest payments.

  Explanation: Here, the pension fund is buying a component that was created by a "strip" transaction, specifically focusing on the principal portion of a bond to match their future liabilities.

Strip (Property Law Context)

In property law, "strip" refers to the act by a tenant, who does not own the land outright, of unlawfully damaging, spoiling, or taking valuable resources or fixtures from the property they are leasing. This action diminishes the value of the property for the owner.

• Example 1: A tenant rents a rural property that includes a small timber stand. Despite the lease agreement explicitly stating that all timber belongs to the landlord, the tenant cuts down and sells a significant number of mature trees for profit before their lease expires.

  Explanation: This is an act of "strip" because the tenant, holding only a temporary interest in the land, unlawfully removed valuable natural resources (the trees), thereby spoiling and diminishing the property's value for the owner.

• Example 2: A commercial tenant leases an office building. Before vacating the premises, and without the landlord's permission, the tenant removes and sells the custom-built reception desk, the high-end kitchen appliances, and the built-in shelving units that were part of the property when they moved in.

  Explanation: This constitutes "strip" as the tenant, who did not own the property, unlawfully took significant fixtures that were considered part of the real estate, thereby spoiling or taking from the land and reducing its value.

• Example 3: A family rents a house with an elaborate, professionally landscaped garden. Before moving out, they dig up and take all the mature ornamental shrubs and rare perennial plants, intending to replant them at their new residence, even though the lease specified that all landscaping was part of the property.

  Explanation: This is an example of "strip" because the tenants, holding only a leasehold interest, unlawfully removed valuable plants that were considered part of the real estate, diminishing the property's aesthetic and market value.