What Are Treasury STRIPS?
A single government bond that normally pays interest twice a year and returns principal at the end can be taken apart and sold as a series of separate, single-payment pieces — that’s the idea behind Treasury STRIPS.
The short answer
Treasury STRIPS, short for Separate Trading of Registered Interest and Principal of Securities, are created when a standard treasury bond’s individual interest payments and its final principal payment are separated and sold as distinct securities. Each resulting piece is a zero-coupon instrument, meaning it makes no periodic payments and instead is bought at a discount and pays its single fixed amount at a set future date.
How the stripping process works
A treasury bond, note, or bill that pays interest on a regular schedule can, through a financial institution or government process, be divided into its component cash flows: each individual interest payment becomes its own zero-coupon security, and the final principal repayment becomes another. Because each piece is now a standalone claim on a single future payment, they trade separately and independently in the market, even though they all trace back to the same original bond.
Why STRIPS trade at a discount
Like any zero-coupon bond, a STRIPS security doesn’t pay interest along the way, so it’s priced below its eventual face value, with the difference between purchase price and the amount received at maturity functioning as the return, conceptually similar to how a bond’s yield to maturity captures total return from purchase price to payoff. The size of that discount depends on how far away the payment date is and current interest rate levels; a STRIPS maturing many years out generally trades at a steeper discount to its face value than one maturing soon, since more time means more opportunity cost is embedded into the price.
Where STRIPS get used in goal-based planning
Because each STRIPS security delivers one known amount on one known future date, they’re sometimes used by investors trying to match a specific future need with a security whose maturity lines up closely with that date, a technique that overlaps with broader approaches to how people set financial goals that stick and choose to fund them. This predictability is a meaningful contrast to bonds that pay periodic interest, since there’s no reinvestment decision to make along the way; the entire return is locked into the original purchase price relative to the fixed future payment.
What to weigh with STRIPS
- Tax treatment differs. Even though no cash is received until maturity, the imputed interest on a STRIPS is often taxable as it accrues each year in a taxable account, a detail that surprises some investors and depends on rules that change over time.
- Price sensitivity. Zero-coupon securities like STRIPS tend to be more sensitive to interest rate changes than coupon-paying bonds of similar maturity, since all the value sits at a single future date rather than being spread across periodic payments.
- No reinvestment risk. Unlike a bond paying regular interest, there’s no periodic payment to reinvest, which some investors see as a feature and others see as a limitation depending on their goals.
- Compare to whole bonds. Reviewing how a standard corporate bond pays over time helps clarify what’s actually being given up by choosing a single-payment structure instead.
The takeaway
Treasury STRIPS turn a single interest-paying bond into a set of individual, single-payment zero-coupon securities, each priced at a discount that reflects time and prevailing rates. Their predictability around a known future payment date is the main appeal, though it comes with its own tax and rate-sensitivity considerations worth weighing against a standard coupon-paying bond.