Treasury STRIPS: Definition & Meaning | Bondfish
STRIPS — Separate Trading of Registered Interest and Principal of Securities — are zero-coupon Treasury securities created by splitting an eligible Treasury note or bond into its individual interest and principal payments, each of which then trades separately at a discount to its face value.
What it means
A normal Treasury bond makes regular coupon payments plus a final principal repayment at maturity. Coupon stripping separates each of those payments into a standalone security: every coupon date becomes its own zero-coupon piece, and the final principal repayment becomes another. The U.S. Treasury does not issue STRIPS directly — brokerage firms and dealers create them from eligible Treasury notes and bonds through the Treasury's book-entry system, and each STRIP can then be bought and sold on its own.
Because a STRIP makes no periodic payments, it is priced purely as a discount to its face (par) value: the investor's entire return comes from the difference between the purchase price and the amount received at maturity, similar to a zero-coupon bond.
Why it matters for bond investors
STRIPS let an investor lock in a known amount of money on a known future date without reinvestment risk on coupon payments, which makes them useful for goal-dated planning (matching a specific expense years out). Their price is also more sensitive to interest-rate changes than a coupon-paying bond of the same maturity, since all of the return arrives at a single point in time. One practical catch: STRIPS generate "phantom income" — the IRS treats the annual accretion in value as taxable income even though no cash is paid until maturity — which is why they are often held in tax-deferred accounts.
Example
A 10-year Treasury bond paying semiannual coupons can be stripped into 20 separate interest STRIPS (one per coupon date) plus 1 principal STRIP (paid at maturity) — 21 individually tradable zero-coupon securities from a single bond.
Related terms
This definition is for general information only and is not investment advice. Bond investing involves risk, including possible loss of principal.