Loading the player...

What are 'Treasury STRIPS'

Treasury STRIPS are fixed-income securities sold at a significant discount to face value and offer no interest payments because they mature at par. STRIPS is an acronym for Separate Trading of Registered Interest and Principal of Securities. These zero-coupon bonds come about when the bond's coupons are separated from the bond or note; an investor's return is determined by the difference between the purchase price and the bond's trading value, or face value if held to maturity.

BREAKING DOWN 'Treasury STRIPS'

Backed by the U.S. government, Treasury STRIPS, which were first introduced in 1985, offer minimal risk and some tax benefits in certain states, replacing TIGRs and CATS as the dominant zero-coupon U.S. security. Although you receive no tangible income, you typically still have to pay federal income tax on the bond's accretion for the year. All issues from the Treasury with a maturity of 10 years or longer are eligible for the STRIPS process. STRIPS cannot be purchased directly from the Federal Reserve or a governmental agency. The securities can be bought by private brokerages.

Coupon Stripping

The act of detaching the interest payments is called coupon stripping. These coupons become separate securities, with the principal payment due at maturity, with no interim coupon payment.

For instance, a 10-year bond with a $40,000 face value and a 5% annual interest rate can be stripped. Assuming it originally pays coupons semi-annually, 21 zero-coupon bonds can be created. This includes the 20 semi-annual coupon payments. Each stripped coupon has a $1,000 face value, which is the amount of each coupon. There is also a bond created from the principal payment at maturity. All 21 securities are distinct and trade in the market.

Popularity of STRIPS

There are several reasons STRIPS have become a popular investment. They have a very high credit quality since the bonds are backed by U.S. Treasury securities. Since STRIPS are sold at a discount, investors do not need a large stash of cash to purchase the bonds. If STRIPS are held to maturity, investors know their payout.

STRIPS offer a range of maturity dates since they are based on the dates of the interest payments. If an investor wishes to sell prior to maturity, the market is very liquid.

Tax Considerations

Generally, taxes are due for the interest earned each year, even though there is no cash payment until maturity or when the STRIPS are sold. However, a tax-deferred account, such as an individual retirement account (IRA) and nontaxable accounts, which include pension funds, avoid this taxation. Each holder of STRIPS receives a report detailing the amount of interest income earned.

RELATED TERMS
  1. Strip

    The strip is the process of removing coupons from a bond and ...
  2. Coupon Stripping

    The separation of a bond's periodic interest payments from its ...
  3. Stripped MBS

    A stripped MBS is a type of mortgage-backed security that is ...
  4. Zero-Coupon Bond

    A zero-coupon bond is a debt security that doesn't pay interest ...
  5. Earnings Stripping

    Earnings Stripping is a commonly-used tactic by multinationals ...
  6. Equity Stripping

    The process of reducing the overall equity in a property in order ...
Related Articles
  1. Investing

    Government Bond ETFs to Date 2016 Performance Review (ZROZ, EDV)

    Find out how government bond exchange-traded funds (ETFs) are performing YTD in 2016, and which are the best and worst performers.
  2. Investing

    How Do I Calculate Yield To Maturity Of A Zero Coupon Bond?

    Yield to maturity is a basic investing concept used by investors to compare bonds of different coupons and times until maturity.
  3. Investing

    Simple Math for Fixed-Coupon Corporate Bonds

    A guide to help to understand the simple math behind fixed-coupon corporate bonds.
  4. Investing

    Corporate Bonds: Advantages and Disadvantages

    Corporate bonds can provide compelling returns, even in low-yield environments. But they are not without risk.
  5. Investing

    All About Zero Coupon Bonds

    Zero-coupon bonds are bonds that do not make any interest payments (which investment professionals often refer to as the "coupon") until maturity. For investors, this means that if you make an ...
  6. Investing

    Long-Term Treasury Bond ETFs Are Attracting Assets in 2016 (TLT, TLH)

    Discover five exchange-traded funds that invest in U.S. Treasury long-term bonds and experienced large year-to-date capital inflows as of March 4, 2016.
  7. Investing

    3 Best High-Yielding Long Term Government Bond ETFs (EDV, ZROZ)

    Learn about three exchange-traded funds that invest in long-term U.S. government bonds and offer high distribution yields to investors.
  8. Personal Finance

    Coupon Shopping: Clip Your Way To Savings

    Use coupons strategically to score big savings on everyday purchases.
RELATED FAQS
  1. When is a bond's coupon rate and yield to maturity the same?

    Find out when a bond's yield to maturity is equal to its coupon rate, and learn about the components of bonds and how they ... Read Answer >>
  2. How do debit spreads impact the trading of options?

    Find out what it means when a bond has a coupon rate of zero and how a bond's coupon rate and par value affect its selling ... Read Answer >>
  3. What is the difference between a zero-coupon bond and a regular bond?

    A zero-coupon bond does not pay coupons or interest payments like a typical bond does; instead, a zero-coupon holder receives ... Read Answer >>
  4. What is the most common solvency ratios used in fundamental analysis?

    Learn about the difference between a bond's coupon rate and its yield rate, how the coupon rate influences market price and ... Read Answer >>
Hot Definitions
  1. Risk Tolerance

    The degree of variability in investment returns that an individual is willing to withstand. Risk tolerance is an important ...
  2. Donchian Channels

    A moving average indicator developed by Richard Donchian. It plots the highest high and lowest low over the last period time ...
  3. Consumer Price Index - CPI

    A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, ...
  4. Moving Average - MA

    A moving average (MA) is a widely used indicator in technical analysis that helps smooth out price action by filtering out ...
  5. Stop Order

    A stop order is an order to buy or sell a security when its price increases past a particular point in order to limit losses ...
  6. Inflation

    The rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of ...
Trading Center