Treasury STRIPS

Using a 5 year Treasury Note, the speaker explains how the cash flows, or coupon payments, of a treasury security can be stripped out of the bond and sold as an individual security, basically as a zero coupon bond.  For example, a 5 year treasury security paying interest semi-annually would have 10 coupon payments.  The prinicipal cash flow in the final period can also be sold off as a security as a zero coupon bond as well.  Therefore, there is a C-STRIP and P-STRIP type of STRIP securities. 

Treasury STRIPS are in demand due to the high levels of interest in zero coupon bonds which have no interest rate or credit risk.  STRIPs can be re-constructed back into a single security and investors like them as they are more sensitive to interest rates than coupon bonds.  On the other side, STRIPs have an illiquid market and tend to trade on the "rich" side, meaning lower yield and higher price as compared to the yield curve.

Tim Ord
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