Question

Explain why a combination of STRIPS created from one Treasury note may sell for more than the original Treasury note.

(Maximum 3 sentences, maximum 100 words.)

Answer 1

STRIPS is an abbreviation for Separate Trading of Registered Interest and Principal of Securities. They are securities which represent seperate interest and principal components of Treasury Securities. They are synthetic zero coupon bonds. They are of two types Interest - Only Strips and Principal - Only Strips.

As they have virtually guaranteed payment, principal only STRIPS make excellent choice in uncertain market therefore it is one reason they sell more than original treasury note.

Also U.S. Treasury does not issue zero coupon securities beyond 26 weeks therefore STRIPS are preferred.