STRIPPED COUPON: See STRIPS

STRIPS stands for Separate Trading of Registered Interest and Principal of Securities. It is a type of zero-coupon bond created by stripping the interest payments (coupons) and the principal payment from a traditional Treasury bond into two separate entities which are then sold individually.

What Are STRIPPED COUPONS?

A stripped coupon refers to the individual interest payments that have been separated from the principal of a bond. In a stripped bond, these coupons are sold separately from the principal payment, allowing investors to purchase specific portions of the bond’s cash flows.

Treasury Securities

When Treasury securities are stripped, the process creates two types of securities:

• Coupon STRIPS: These represent the interest payments.
• Principal STRIPS: These represent the principal repayment at maturity.

Applicability to Investors

STRIPS offer unique benefits to certain types of investors including:

• Pension Funds: Targeting specific future payout dates.
• Insurance Companies: Matching the durations of liabilities.
• Individual Investors: Seeking to lock in a fixed return for a future need.

Zero-Coupon Bonds

Like STRIPS, zero-coupon bonds are sold at a discount and do not make periodic interest payments. However, they differ because STRIPS are derived from traditional bonds, whereas zero-coupon bonds are issued directly as such.

Treasury Bond

A Treasury Bond is a long-term, interest-bearing bond issued by the U.S. Department of the Treasury with maturity periods of up to 30 years, from which STRIPS are derived.

FAQs

Q1: How does the taxation of STRIPS work? A1: STRIPS are taxed annually on their imputed interest, similar to zero-coupon bonds, even though the investor does not receive this interest until maturity.

Q2: Can I reintegrate my STRIPS into a single bond? A2: No, once a Treasury bond is stripped, the components (coupons and principal) are traded separately and cannot be recombined into the original bond.