Treasury STRIPS
Treasury STRIPS (Separate Trading of Registered Interest and Principal of Securities) is an investment tool for U.S. Treasury securities. It splits standard U.S. Treasury bonds into two separate components: the coupon interest part and the principal part.
Treasury STRIPS
Definition
Treasury STRIPS (Separate Trading of Registered Interest and Principal of Securities) is a type of U.S. Treasury investment tool. It separates standard U.S. Treasury bonds into two distinct parts: the interest component and the principal component. Investors can purchase these parts separately to achieve different investment strategies.
Origin
The concept of Treasury STRIPS originated in 1985 when the U.S. Treasury introduced this tool to meet investors' demand for more flexible Treasury investment options. By separating the interest and principal of Treasury bonds, investors can better manage cash flow and interest rate risk.
Categories and Characteristics
Treasury STRIPS are mainly divided into two categories: the interest component and the principal component. Their characteristics include:
- Flexibility: Investors can choose to purchase the interest component or the principal component based on their needs.
- Zero-Coupon Bond Characteristics: The separated parts resemble zero-coupon bonds, which do not pay periodic interest but are issued at a discount and pay the face value at maturity.
- Low Risk: Since they are issued by the U.S. government, they have a high credit rating and low risk.
Specific Cases
Case 1: Suppose an investor wants to receive a fixed cash flow over the next five years but does not need the principal. This investor can purchase the interest component of Treasury STRIPS and receive fixed interest payments annually.
Case 2: Another investor wants to receive a large sum of money in ten years for retirement but does not need interim interest payments. This investor can purchase the principal component of Treasury STRIPS and receive the full principal at maturity.
Common Questions
Question 1: Can the interest and principal components of Treasury STRIPS be traded on the secondary market?
Answer: Yes, the interest and principal components of Treasury STRIPS can be traded independently on the secondary market.
Question 2: Do investors need to pay taxes on Treasury STRIPS?
Answer: Yes, although Treasury STRIPS do not pay periodic interest, investors are still required to pay taxes on the accrued interest each year.
