Separate Trading of Registered Interest and Principal of Securities (STRIPS)
What Is Separate Trading of Registered Interest and Principal of Securities (STRIPS)?
STRIPS are U.S. Treasury securities created by separating the interest payments and principal payment of a Treasury bond or note into individual securities. Each piece can then be bought and sold separately as a zero-coupon security.
STRIPS allow investors to purchase a specific future payment rather than a bond with regular interest payments.
Why It Matters
STRIPS can be useful for investors who want a known payment on a specific future date, such as for retirement planning, education funding, or liability matching. Because they do not make periodic interest payments, they are especially sensitive to changes in interest rates.
They offer predictable maturity values but can be more volatile in price before maturity.
How STRIPS Work
A Treasury security with multiple future payments is separated into components.
Each component becomes its own tradable security:
- individual interest payments
- the final principal repayment
Investors buy the STRIP at a discount and receive the full face value at maturity.
Example
An investor who wants a guaranteed payment ten years from now may buy a Treasury STRIP that matures in ten years and pays its full face value then.
STRIPS vs Treasury Bonds
- STRIPS are zero-coupon pieces of Treasury securities sold separately.
- Treasury bonds typically make regular interest payments and return principal at maturity.
FAQs About STRIPS
Do STRIPS pay regular interest?
No. STRIPS do not make periodic coupon payments.
Why are STRIPS sold at a discount?
They are purchased below face value and mature at full value.
Are STRIPS backed by the U.S. government?
Yes. They are based on U.S. Treasury securities.
Related Terms
