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Bonds, financial instruments that pay periodic interest and pay back a principal amount at maturity, normally have coupons attached to them that are good for one interest payment each - so the main Bond Certificate is good for the principal amount, and it will have as many coupons as interest payments. For example, a ten-year bond that was just issued that pays interest twice a year would have twenty coupons attached. As each interest payment was issued, the coupon would be detached and handed in to the issuer. (this is usually kept track of electronically these days, but that's the basic concept.)

Strip bonds, or stripped bonds, on the other hand, are bonds that have had the interest coupons detached and sold separately from the principal. A strip bond refers to either a package of interest coupons or to the cert good for the principal - if they are from the same bond originally, they will be priced almost identically in most cases. Strip bonds are priced much lower than normal bonds to reflect the fact that they provide no income, but their effectice yield, the percentage you will gain by buying and holding them, ends up pretty close. Strip bonds generally provide a better yield than conventional bonds, and so they can be very advantageous to an investor who doesn't need regular income payments. The only downside to the arrangement is liquidity - strip bonds will almost always be less liquid than the issue they came from - but for most strips this isn't major problem.

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