STRIPS (zero-coupon Treasury).
In plain English
STRIPS, short for Separate Trading of Registered Interest and Principal of Securities, are the individual cash flows of a Treasury bond sold as standalone zero-coupon securities. A dealer takes a Treasury note or bond and splits it, so each future coupon date and the final principal become their own tradable piece. Each piece pays nothing along the way and returns one fixed amount on one date, so it sells for less than that amount. The discount is the entire return. Because there is no coupon to reinvest, the yield quoted at purchase is the yield actually earned if the security is held to maturity.
01Why it matters
A STRIP locks in a known dollar amount on a known date, which is why they are used to line up money with a future obligation, but their prices swing harder than coupon bonds when rates move.
02The math, step by step
Say a STRIP maturing in 10 years pays 10,000 dollars and costs 6,140 dollars today. That is a compound return of about 5 percent a year, since 6,140 grown at 5 percent for ten years lands near 10,000. Nothing arrives in between.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
It is not the same instrument. A Treasury bond pays cash twice a year. A STRIP pays once, at the end. That single payment makes STRIPS far more sensitive to interest rate changes, so the same rate move hits their price harder.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
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