Lesson 7 of 12
STRIPS stands for Separate Trading of Interest and Principal Securities.
These are zero-coupon securities that trade at a significant discount to the face value.
STRIPS were introduced by the US government in 1985. Since they are backed by the government, they have near zero risk, and also offer tax benefits. They are also free from re-investment risk.
The advantage with STRIPS is that they allow investors to hold only the interest or the principal components of Treasury notes and bonds. These are called interest-only and principal-only STRIPS.
Since the strips don't offer any interest rates, the investor receives the payment only at maturity.
The STRIPS are not directly issued by the government. They are separated and sold by investment banks or brokerage firms. The government registers the STRIPS in its book-entry system. You can buy them only through a broker; they are not available through TreasuryDirect.
STRIPS generally have a higher bid-ask spread compared to regular coupon bonds, and also are less liquid compared to similar coupon bonds.