Glossary term
Treasury STRIPS
Treasury STRIPS are zero-coupon Treasury securities created by separating a Treasury bond or note into individual principal and interest components.
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What Are Treasury STRIPS?
Treasury STRIPS are zero-coupon Treasury securities created by separating a Treasury note or bond into individual principal and interest components. STRIPS stands for Separate Trading of Registered Interest and Principal of Securities.
Instead of receiving periodic coupon payments, a STRIPS investor buys a separated component at a discount and receives its face value at maturity. The return comes from the difference between the purchase price and the maturity value.
Key Takeaways
- Treasury STRIPS are zero-coupon Treasury securities.
- They are created by separating eligible Treasury securities into principal and interest pieces.
- Investors buy STRIPS at a discount and receive face value at maturity.
- STRIPS can be useful for matching a known future liability.
- They can be highly sensitive to interest-rate changes, especially at longer maturities.
How Treasury STRIPS Work
Eligible Treasury notes and bonds pay interest through coupons and repay principal at maturity. Through the STRIPS program, those cash flows can be separated and traded as distinct securities. Each coupon payment and principal payment becomes its own zero-coupon security with its own maturity date.
Financial institutions usually create STRIPS through the Treasury system, and investors buy them in the secondary market through brokers or custodians. TreasuryDirect does not sell STRIPS directly to individual investors.
Principal STRIPS and Interest STRIPS
Component | What it represents |
|---|---|
Principal STRIP | The final principal repayment of the original Treasury security. |
Interest STRIP | One separated coupon payment from the original Treasury security. |
Both trade as zero-coupon instruments after separation. Their prices depend on maturity, current interest rates, demand, liquidity, and the Treasury yield curve.
Why Investors Use STRIPS
STRIPS can help match a known future cash need. A pension plan, insurance company, college saver, or individual investor may want a Treasury-backed payment on a specific future date. A zero-coupon Treasury component can make that liability-matching cleaner than reinvesting coupon payments along the way.
They can also be used for duration exposure. Long-maturity STRIPS can be very sensitive to rate changes because all cash flow arrives at maturity. When yields fall, long STRIPS can rise sharply. When yields rise, they can fall sharply.
Interest-Rate and Tax Considerations
The lack of coupons does not mean there is no taxable income along the way. In taxable accounts, investors may owe tax on imputed interest, often called original issue discount, even though they do not receive cash until maturity. That can create a cash-flow mismatch.
For that reason, STRIPS are often more comfortable in tax-deferred accounts or institutional portfolios where the tax treatment and cash-flow timing are planned deliberately. Investors should review tax reporting before buying them in a taxable account.
STRIPS Versus Treasury Bills
Treasury bills are short-term Treasury securities issued at a discount with maturities of one year or less. STRIPS can have much longer maturities because they are created from Treasury notes and bonds. Both are zero-coupon style instruments, but their interest-rate sensitivity can be very different.
A short Treasury bill may be used for cash management. A long Treasury STRIP is usually a duration or future-liability tool, not a cash substitute.
Price Behavior
Long STRIPS can move more sharply than coupon-paying Treasuries with similar final maturities because the investor receives no interim coupon cash flows. More of the value depends on one distant payment. That makes duration a central part of the analysis: STRIPS can be precise liability-matching tools, but they are not automatically stable on the way to maturity.
The Bottom Line
Treasury STRIPS are separated Treasury cash flows that trade as zero-coupon securities. They can match future liabilities and provide precise maturity exposure, but long-maturity STRIPS can be volatile and may create tax obligations before cash is received.