What are Treasury STRIPS

Treasury strips are created out of coupons of treasury notes and treasury bonds and the principle.  Government dealer firms and authorized market participants like banks buy treasury notes and treasury bonds (which usually pay coupons semi-annually) and market the coupons as separate zero coupon bonds.

The main purpose of this stripping is to create liquidity in the market by offering coupons as separate bonds of different maturity periods to meet the needs of different investors of varying tenor preferences.

A treasury bond of 15 year tenor is split into 31 zero coupon bonds; 30 out of semi-annual coupons and one out of principal, paid at the end of 15 years.

To elaborate further, in the above example if the Treasury bond pays the coupons at a rate of 10% and the face value of the bond is $10,000

Zero coupon bonds can be created as below

1st Zero Coupon bond of face value/redemption value  $500 and tenor 6 months (1st coupon: 10,000 * 0.1 * 6/12)

2nd  Zero Coupon bond of face value  $500 and tenor 1 year

and so on

And 31st zero Coupon bond of $10,000 and tenor of 15 years.

Notes:

Treasury bond:  A long term bond issued by federal government

Treasury note: A medium term bond issued by federal government

Treasury bill: A short term bond issued by federal government

STRIP is an Acronym for Separate Trading of Registered Interest and Principal Securities

Since Treasury bills, themselves are zero coupon bonds, they are not stripped further.

Treasury strips are not yet available in India. Government and RBI are making efforts to make them available in the near future.