Treasury STRIPS are zero-coupon securities created by separating eligible Treasury principal and interest payments into tradable claims.
Treasury STRIPS are zero-coupon securities created by separating the principal payment and each remaining interest payment of an eligible U.S. Treasury security into independently tradable claims. STRIPS stands for Separate Trading of Registered Interest and Principal of Securities.
Treasury does not auction STRIPS as new securities. Eligible notes, bonds, and TIPS are stripped or reassembled in the commercial book-entry system by financial institutions, government-securities brokers, and dealers. Investors buy, hold, sell, and redeem STRIPS through those intermediaries rather than TreasuryDirect.
Suppose an eligible Treasury bond has 10 years remaining and pays interest every six months. Before stripping, it has 20 remaining coupon payments plus one principal payment. After stripping, those cash flows become 21 securities with separate CUSIPs and payment dates.
| Component | Cash flow | Maturity |
|---|---|---|
| Principal strip | Original bond principal | Original bond maturity date |
| Coupon strip | One scheduled interest payment | That coupon’s payment date |
| Reassembled bond | All remaining coupons plus principal | Original schedule restored |
Reassembly requires all remaining components needed to recreate the original security. Stripping and reassembly occur in $100 par increments under current TreasuryDirect rules.
A simplified annual-effective-yield price formula is:
Where P is price, F is the single maturity payment, y is the annual effective yield, and n is years to maturity. Market quotations can use different compounding and settlement conventions, so the formula must match the actual quote before it is used for valuation.
Because all value is received at maturity, a STRIP normally sells below its maturity amount when yield is positive. The price accretes toward the maturity payment as time passes if the required yield remains unchanged.
Assume a principal STRIP will pay $10,000 in 10 years and is valued at a 4.00% annual effective yield:
The investor pays approximately $6,755.64 for the contractual $10,000 maturity payment. The $3,244.36 difference is the pre-tax economic accretion over 10 years if the security is held and paid as scheduled.
That difference is not deferred automatically for federal tax purposes. OID can be reportable annually even though no cash coupon is received. The actual annual accrual depends on tax rules, acquisition price, date, and reporting information; it is not simply $3,244.36 / 10.
For a zero-coupon security, Macaulay duration equals its time to maturity because the only cash flow occurs at the end. Under annual compounding, modified duration is approximately:
For the 10-year, 4% example, modified duration is about 9.62. A yield increase of 0.50 percentage point gives a first-order price estimate of:
Estimated price change = -9.62 x 0.005 = -4.81%
The estimate excludes convexity and assumes a small, immediate yield change. Actual price depends on exact settlement, quotation convention, and market conditions.
| Instrument | How created | Interim cash | Main distinguishing risk |
|---|---|---|---|
| Treasury STRIP | Separated eligible Treasury payment | None | High duration, inflation, liquidity, and OID tax |
| Treasury bill | Issued directly by Treasury for one year or less | None | Short-term reinvestment and rate risk |
| Corporate zero-coupon bond | Issued by a company | None | Corporate credit plus duration and liquidity risk |
| Zero-coupon bond fund | Portfolio of securities | Fund distributions vary | No fixed maturity payment to each shareholder |
A Treasury bill is issued as a short-term discount security. A STRIP is created from a payment belonging to an eligible note, bond, or TIPS and can have a much longer maturity.
CATS (Certificates of Accrual on Treasury Securities), TIGRs (Treasury Investment Growth Receipts), and similar labels describe historical broker-created receipts backed by Treasury cash flows. They helped meet demand for zero-coupon Treasury exposure before or alongside the official book-entry STRIPS framework.
These historical receipts are not newly auctioned Treasury product families. Identify any old position from its CUSIP, issuer or sponsor, custody record, and governing terms rather than relying on a nickname such as CATS, M-CATS, or TIGR.
This article is educational and is not individualized investment or tax advice. STRIPS require careful review of duration, settlement, liquidity, custody, and current tax reporting.