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Treasury STRIPS are 0 coupon long term Government securities. Their maturities are normally over 10 years out to 30 years. They are backed by the US Government, thus they carry no credit risk.
T STRIPS do not pay interest, since they are 0 coupon bonds. They are created from called back treasury notes and bonds by the US Government. The yield is calculated based on the price paid and par value at redemption.
During times of lower short term interest rates, Strips are more popular. When yield levels are low - especially short term bank rates, reinvesting bond proceeds is not attractive. T Strips do not have reinvestment risk, because they are zero coupon securities. Reinvestment risk is when you are forced to reinvest proceeds or interest from one security. During times of low interest yields, having 0 coupon investments works to an investor's benefit - in theory.
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Copyright  2006 American Investment Training, Inc.
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