Learn something new every day More Info... by email
Treasury "STRIPS," or Separate Trading of Registered Interest and Principal Securities, are investments that a bank or brokerage firm creates by restructuring the payment obligation of certain types of securities. To create Treasury STRIPS, a firm takes a specific type of security, breaks it apart into separate components, and sells each component to investors. Breaking the security apart is called stripping, and each component becomes a separate security instrument. The term security instrument is a broad term that describes stocks, bonds, and many other investment vehicles.
A brokerage firm can only restructure certain types of securities into Treasury STRIPS. For example, an investment bank purchases securities such as Treasury Notes, also known as T-Notes. A T-Note pays its holder a certain interest rate every six months. It also contains a maturity date that may be from one year to 10 years, which means that the holder of the T-Note may cash it in at the maturity date and receive a principal payment of a specified amount. Hence, the holder of a 10-year T-Note would receive 20 interest payments plus a principal payment when the T-Note reaches maturity.
If a brokerage firm wants to create Treasury STRIPS, it can take the 10-year T-Note and restructure it into separate securities. This means that each six-month interest payment obligation would become a distinct security instrument. The principal payment obligation when the T-Note reaches maturity would also become a separate security instrument. The firm could then sell each instrument from the 10-year T-Note as Treasury STRIPS to different investors. Companies that create Treasury STRIPS sell each newly created security instrument as a zero-coupon bond to investors.
Bankers use the term zero-coupon bonds for Treasury STRIPS because the bonds pay no interest to the holder. Instead, this kind of bond pays a specified amount when it reaches its maturity date. Zero-coupon bonds provide various maturity dates for investors. For instance, an investor may choose to purchase zero-coupon bonds that only mature at six months, at 30 years, or at any other period in between.
In addition to T-Notes, a broker can create Treasury STRIPS from Treasury bonds and Treasury Inflation Protected Securities (TIPS). Treasury bonds or T-Bonds are similar to T-Notes except that the maturity dates run from 20 to 30 years. TIPS have maturity dates of five, 10, or 30 years. The U.S. Treasury issues T-Notes, T-Bonds, and TIPS. It, however, does not issue Treasury STRIPS.
One of our editors will review your suggestion and make changes if warranted. Note that depending on the number of suggestions we receive, this can take anywhere from a few hours to a few days. Thank you for helping to improve wiseGEEK!