An InterestOnly Strip, or InterestOnly Security, is a bond with a maturity date but on the maturity date it does not pay out the nominal value. Such an instrument is created when a bond is splitted into a zerocoupon bond and an InterestOnly Strip. A zerocoupon bond does not pay any interest but it does pay the nominal value on the maturity date.
Suppose there is an InterestOnly paying $ 40 once a year. The last payment is on January 1, 2020. Your desired annual yield is 3%. By entering the data below into the calculator you can compute the value of this InterestOnly Strip on May 7, 2009:
Field  Value  Remark 
Nominal interest  4  Combined with the Nominal Value of 1000 this tells the calculator that the bond pays a yearly coupon of $ 40. 
Coupon period  12 months  
Date computation  20090507  Date format is YYYYMMdd. 
Maturity date  20200101  
Interest in advance or afterwards  afterwards  This is the usual. 
Nominal value  1000  Combined with the Nominal Interest of 4% this tells the calculator that the bond pays a yearly coupon of $ 40. 
Compute Yield to Maturity or Value  Value  
Yield  5  
The result will appear in the field Present value coupons.
The bond calculator can not compute the yield of an InterestOnly Strip with 100% accuracy. However it is usually possible to produce a very good estimate. In the example above suppose the market value is $ 337. Enter the following date into the bond calculator to compute an approximation of the yield.
Field  Value  Remark 
Nominal interest  4000  Combined with the Nominal Value of $ 1 this tells the calculator that the bond pays a yearly coupon of $ 40. 
Coupon period  12 months  
Date computation  20090507  Date format is YYYMMdd. 
Maturity date  20200101  
Interest in advance or afterwards  afterwards  This is the usual. 
Nominal value  1  Combined with the Nominal Interest of 4000% this tells the calculator that this instrument pays $ 40 each year. The higher the value in this field the worse the approximation of the yield. 
Compute Yield to Maturity or Value  Yield  
Yield  5  
Market value  337  
Add coupon to market value  Checked  
The result in field Yield is more accurate the smaller the difference between field Present value coupons and field Market value.
