What are STRIPs in the bond market?

Alka Pandey, Noida

It is another product of the US financial innovation. The value of a bond in the market depends mainly upon the coupon rate of interest vis-à-vis the prevailing rate of interest for a similar maturity. Any reduction in the prevailing interest rate for similar maturity vis-à-vis the coupon rate pushes up the valuation and vice-versa. Enter STRIPs and it can distort this picture because a bond is stripped of its interest and the principaland the interest components are traded separately. Obviously the principal component would languish and, if anything, trade at a steep discount - the longer the maturity, the steeper the discount. A bond is valued in the market mainly on the touchstone of the interest rate and if it's denuded of interest, all trading interest vanishes except when the needy ones infuse interest in the dormant market.

Insurance benefits

Which one is more needed, life or health insurance?

Shah Alam Khan, Moradabad

For a bachelor with no dependents, life insurance is not required at all. On the contrary, he would certainly feel the need for a health cover sooner than later in his life, especially when the middle age blues shake him upHealth insurance is a must for everybody unless of course his employer undertakes this burden. But even an employee who enjoys health protection from his employer would be advised to have his own cover just in case he leaves his job or loses it.

Full-time directors

Should all directors of a company be full-time? Part-time directors invoke visions of laid- back luxuriating.

Adam Malik, Mumbai

This is the reaction of many people to the idea of independent or part-time directors. They attend board meetings but are not hands-on whereas an executive director tends to know the ins and outs of the company and its external environs in view of his day-today and closer association with the company. But then the accent on independent directors by regulators all over the world including in India is for a different reason - to function as a spring board for ideas for execution by the executive directors and to rein in on their vaulting ambitions. Independent directors often bring considerable domain expertise to the table for the company to profit from. There is a need for an ideal blend of independent and executive directors on boards of companies.

Asset stripping

What is asset stripping?

Rajat Aggarwal, Gwalior

It refers to the rapacious practice of acquiring a company or business not enamoured by its business possibilities but by its assets. A prime land could be owned by a company and this could be coveted by an acquirer. The M&A saga is replete with instances of acquirers having no abiding interest in the basic business of the target company, with their interest being confined to biding the time for disposal of the asset. The income-tax law allows the right to carry forward the losses of the amalgamating company only when the amalgamated company refrains from asset stripping for the prescribed number of years and restores the production capacity of the unit taken over within the prescribed time.

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(This article was published on June 5, 2011)
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