Treasury STRIPS
Candlefocus EditorSTRIPS are sold at a discount to their face value and pay full face value at their maturity, providing investors with a higher degree of predictability and reliable cash flow rather than a variable coupon payment. Unlike coupon-bearing bonds, STRIPS do not provide periodic income payments as holders do not receive any regular interest.
STRIPS were initially only offered to bonds that had a ten-year maturity or longer, but have since been extended to other bonds and notes based on their eligibility. They can be held through a financial institution or broker and are believed to be relatively low risk since they are backed by the full faith and credit of the U.S. government.
The principal amount of a bond is broken into a number of strips, each representing one principal payment stream. Each strip is then separately tracked and documented, so it can be traded independently on the secondary market. STRIPS also offer the advantage of being exempt from federal, state, and local taxes.
Treasury STRIPS can be a great way to provide a predictable income stream for retired investors, and are popular with those who want to reduce the volatility of their portfolio or maintain their current standard of living. For investors interested in the predictability of cash flows, rather than potential capital gains, Treasury STRIPS are an attractive option.