Series 7: 2.12.3. STRIPS

2.12.3. STRIPS

As you just learned, except for short-term Treasury bills, Treasury securities pay investors in two ways: semiannual interest payments and payment of the par (face) value at maturity. But some investors want to receive one lump sum payment at maturity, such as with a Treasury bill but with a much longer maturity. This type of bond is called a zero coupon bond because it does not pay interest during the life of the bond. Instead, a zero coupon bond is sold to an investor at a deep discount, and when it matures, the investor is paid a lump sum that combines the initial investment plus all the interest it would have earned during the life of the bond.

The problem is that the U.S. Treasury does not offer long-term zero coupon bonds. So private issuers, such as broker-dealers, have stepped in and created STRIPS (Separate Trading of Registered Interest and Principal of Securities), which are long-term zero coupon bon