Treasury STRIPS

What are Treasury Strips?


Treasury STRIPS bring liquidity into the marketplace by providing investors with an increased number of maturity options.  In an attempt to provide investors with exposure to specific maturity dates the treasury began stripping, or disaggregating, the principal & semi-annual cash flows of treasury notes, treasury bonds & treasury inflation protected securities into individual securities with their own CUSIP.  Each security can be traded in the secondary market and effectively becomes a zero-coupon bond with a different maturity date.  Since treasury bills are already configured as zero-coupon instruments, there is no need to strip them.

Banks wishing to take part in the Treasury STRIPS program will send the security to the treasury and the treasury will return the coupon payment strips and principal strip back to the bank.  Banks, in turn, will market these individual maturities to their customers. 

Looking at our 3 year treasury note example, you can see how the security is "stripped" into 6 coupon securities & 1 principal security.

Treasury STRIPS Example

Conversely, if a financial institution wants to create a treasury security, they can reach into the secondary market and collect the principal and unmatured coupon strips and send these securities back to the treasury allowing them to reconstitute or reassemble the treasury security.

Continue to Part 12 - What is LIBOR?

Back to Part 10 - Fundamentals of Bond Math

Tim Ord
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