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Treasury STRIPS

Posted on October 19, 2025October 20, 2025 by user

Treasury STRIPS (Zero-Coupon Treasuries)

Key takeaways
* Treasury STRIPS (Separate Trading of Registered Interest and Principal of Securities) are zero-coupon U.S. government securities sold at a discount and redeemed at face value at maturity.
* STRIPS are created by separating a Treasury bond’s coupon payments from its principal; each piece becomes an individually tradable security.
* They are backed by the full faith and credit of the U.S. government, offer predictable payoffs, and have a liquid secondary market.
* Taxes are due annually on imputed interest unless held in a tax-advantaged account (e.g., IRA).
* STRIPS are purchased through brokers or financial institutions — they are not sold directly by the Treasury to retail investors.

What are Treasury STRIPS?

STRIPS are zero-coupon instruments derived from Treasury notes and bonds. When a Treasury security is “stripped,” its future semiannual interest payments (coupons) and its principal repayment are separated into distinct securities. Each stripped piece has a fixed maturity and pays no interim cash interest; the return comes from buying at a discount and receiving full face value at maturity.

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How they work (coupon stripping)

Coupon stripping detaches each coupon payment and the principal into separate zero-coupon securities. For example: a 10-year Treasury with a $40,000 face value and a 5% annual coupon (paid semiannually) produces 21 tradable pieces — 20 semiannual coupon strips (each with $1,000 face value) and one principal strip redeemed at maturity. Investors buy these strips at a discount and realize the difference between purchase price and redemption value as their return.

History and evolution

Early forms of stripped Treasuries existed in the 1960s but were discontinued. The modern STRIPS program began in 1985 after tax-law changes allowed separation of principal and coupon payments for longer-dated Treasuries. Over time the program expanded from select maturities to include essentially all Treasury notes and bonds.

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Benefits

  • Credit quality and safety: Backed by the U.S. government, STRIPS carry very low default risk.
  • Predictability: Known redemption amounts and dates make STRIPS useful for goal-based planning (e.g., funding tuition or a future liability).
  • Wide range of maturities: Investors can match specific future cash needs by choosing strips with appropriate payment dates.
  • Low entry cost for coupons: While whole Treasury issues have large minimums, individual coupon strips can be purchased for much smaller amounts on the secondary market.
  • Liquidity: A robust secondary market allows buying and selling before maturity.

Considerations and tax implications

  • Imputed interest: Although no cash interest is received periodically, investors must recognize and pay tax each year on accrued (phantom) interest unless the strip is held inside a tax-advantaged account.
  • Purchase channel: STRIPS are acquired through brokers or financial institutions; they are not available directly from Treasury retail offerings.
  • Price sensitivity: As zero-coupon instruments, STRIPS are sensitive to interest-rate changes — longer maturities exhibit greater price volatility.

How to invest in STRIPS

  • Open an account with a brokerage or financial institution that trades Treasuries.
  • Search for STRIPS by maturity date and CUSIP (broker-provided identifiers) or ask your broker for available coupon and principal strips.
  • Consider holding STRIPS in tax-deferred accounts if you want to avoid annual taxation on imputed interest.
  • Match maturities to your cash-flow needs and be mindful of interest-rate risk if you plan to sell before maturity.

Bottom line

Treasury STRIPS provide a simple, government-backed way to lock in a known future payment without interim cash flows, making them well suited for investors targeting specific future liabilities. They offer high credit quality and predictable outcomes, but carry annual tax reporting requirements on accrued interest and greater price sensitivity to interest-rate movements than coupon-paying Treasuries.

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