Treasury STRIPS
What is a stripped security?
When a Treasury fixed-principal or inflation-indexed note or bond is stripped, each interest payment and the principal payment becomes a separate zero-coupon security. Each component has its own identifying number and can be held or traded separately. For example, a Treasury note with 10 years remaining to maturity consists of a single principal payment at maturity and 20 interest payments, one every six months for 10 years. When this note is converted to STRIPS form, each of the 20 interest payments and the principal payment becomes a separate security. STRIPS are also called zero-coupon securities because the only time an investor receives a payment during the life of a STRIP is when it matures.
How do I buy STRIPS?
The Treasury does not issue or sell STRIPS directly to investors. STRIPS can be purchased and held only through financial institutions and government securities brokers and dealers.
Why do investors hold STRIPS?
STRIPS are popular with investors who want to receive a known payment at a specific future date. For example, some State lotteries invest the present value of large lottery prizes in STRIPS to be sure that funds are available when needed to meet annual payment obligations that result from the prizes. Pension funds invest in STRIPS to match the payment flows of their assets with those of their liabilities to make benefit payments. STRIPS are also popular investments for individual retirement accounts, 401(k)-type savings plans, and other income tax-advantaged accounts that permit earnings to accumulate without incurring immediate income tax consequences. See the Federal income tax treatment of STRIPS section of this document.
The Department of the Treasury does not provide investment advice. Your investment advisor, financial institution, government securities broker or dealer, accountant, and/or tax advisor can discuss STRIPS in the context of your investment needs.
Which Treasury securities are eligible to be stripped?
All Treasury notes and bonds are strippable.
How is a Treasury security stripped?
A financial institution, government securities broker, or government securities dealer can convert an eligible Treasury security into interest and principal components through the commercial book-entry system. Generally, an eligible security can be stripped at any time from its issue date until its call or maturity date.
Securities are assigned a standard identification code known as a CUSIP number. CUSIP is the acronym for Committee on Uniform Security Identification Procedures. Just as a fully constituted security has it a unique CUSIP number, each STRIPS component has a unique CUSIP number. All interest STRIPS that are payable on the same day, even when stripped from different securities, have the same generic CUSIP number. However, the principal STRIPS from each note or bond have a unique CUSIP number.
For example, if several fixed-principal notes and bonds that pay interest on May 15 and November 15 are stripped, the interest STRIPS that are payable on the same day (for example, May 15, 2026) have the same CUSIP number. However, the principal STRIPS of each fixed-principal note and bond have a unique CUSIP number, and principal STRIPS with different CUSIP numbers that pay on the same day are not interchangeable (or "fungible").
In the case of inflation-indexed notes and bonds, the semiannual interest STRIPS that are payable on the same day (for example April 15, 2026) have the same CUSIP number. The principal STRIPS also have a unique CUSIP number. The CUSIP numbers for STRIPS from inflation-indexed securities are different from those for STRIPS from fixed-principal securities.
See the Federal rules pertaining to STRIPS on this website (31 C.F.R. 356.31) for more information on stripping. Also, see Appendix B to 31 C.F.R., Part 356, for an example of the adjustment that must be made to the value of a stripped interest component of an inflation-indexed security to make it interchangeable with the interest components of other inflation-indexed securities with the same payment date.
What are minimum par amounts for stripping?
Fixed-principal securities: The minimum face amount needed to strip a fixed-principal note or bond is $1,000 and any par amount to be stripped above $1,000 must be in a multiple of $1,000.
Inflation-indexed securities: The minimum face amount needed to strip an inflation-indexed note or bond is $1,000 and any par amount to be stripped above $1,000 must be in a multiple of $1,000.
Are STRIPS safe investments?
STRIPS are obligations of the Treasury and are backed by the full faith and credit of the United States.
Market prices of STRIPS fluctuate more than the prices of fully constituted securities of the same maturity. The market price of a STRIP reflects the fact that there is only one payment on a specific date in the future. The market price of a fully constituted Treasury note or bond reflects the fact that there is a series of semiannual interest payments and a final payment at maturity. The longer the maturity of STRIPS, the greater is the potential market price fluctuation.
STRIPS sell at a discount because there are no periodic interest payments. An investor's income on a STRIP that is held to maturity is the difference between the purchase price and the amount received at maturity. Long-term STRIPS have lower market prices than short-term STRIPS, because long-term STRIPS accrue interest over a longer period of time. For example, assume that three STRIPS are quoted in the market at a yield of 6.50 percent. The price for STRIPS with 25 years remaining to maturity would be $202.07 per $1,000 face amount; that for STRIPS with 10 years remaining to maturity would be $527.47 per $1,000 face amount, while that for 2-year STRIPS would be $879.91 per $1,000 face amount.
The total income from a STRIPS security is fixed at the time of purchase when the security is held to maturity. When STRIPS are sold before maturity, however, the investor could realize a gain or loss because the market price could be more or less than the purchase price plus the amount of interest (and the inflation adjustment to principal in the case of inflation-indexed notes and bonds) that has accrued between the time the security was purchased and the sale date.
Are STRIPS readily available?
There is a large and active market for STRIPS components of fixed-principal securities. Many brokers and dealers make markets in these securities and other market participants include pension funds, financial institutions, investment funds, and individuals. While the liquidity of particular issues may vary from time to time, in general a busy market exists for STRIPS with maturities from a few months to 30 years. A market has not yet developed for stripped components of inflation-indexed securities.
What is the Federal income tax treatment of STRIPS?
Generally, an investor must report as income, for Federal income tax purposes, the interest earned on STRIPS in the year in which it is earned. Inflation adjustments to principal on inflation-indexed securities must also be reported in the year earned. Income must be reported even though it is not received until maturity or the STRIPS are sold. Every investor in STRIPS receives a report each year displaying the amount of STRIPS interest income from the financial institution, government securities broker, or government securities dealer that maintains the account in which the STRIPS are held. This statement is known as IRS Form 1099 - OID, the acronym for original issue discount. The income-reporting requirement has meant that STRIPS are attractive investments for tax-deferred accounts, such as individual retirement accounts and 401(k) plans, and for non-taxable accounts, which include pension funds.
The income tax treatment of STRIPS also takes into account market discount and capital gains or losses, if any. Therefore, an investor would be well advised to review possible income tax implications before investing in STRIPS. For further information on the tax treatment of STRIPS and other zero-coupon securities, see Internal Revenue Service Publication 550, "Investment Income and Expenses" on the Internal Revenue Service website at:
Can the STRIPS components be reassembled into a whole security?
STRIPS components can be reassembled or "reconstituted" into a fully constituted security in the commercial book-entry system. To reconstitute a security, a financial institution or government securities broker or dealer must obtain the appropriate principal component and all unmatured interest components for the security being reconstituted. The principal and interest components must be in the appropriate minimum or multiple amounts for a security to be reconstituted.
The flexibility to strip and reconstitute securities allows investors to take advantage of various holding and trading strategies under changing financial market conditions that may tend to favor trading and holding STRIPS or fully constituted Treasury securities.
Further questions?
If you have questions about buying or selling STRIPS, contact your financial institution, broker, dealer, or investment advisor. See also 31 CFR 356.31 for rules relating to stripping and reconstituting Treasury securities. If you have specific questions on the process for stripping or reconstituting Treasury securities, call the Bureau of the Public Debt at (202) 691-3550.