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10. STRIPS - STRIPS The Separate Trading of Registered...

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STRIPS The Separate Trading of Registered Interest and Principle (STRIPs) program began in 1995. A strip is a Treasury security that has been separated into its component parts: each interest payment and the principle payment become a separate zero-coupon security. For example, a 10-year Treasury note consists of 1 principle payment, which the holder receives at maturity, and 20 semiannual interest payments. When this note is stripped, 21 separate securities are created. Today, most fixed-principal and inflation-indexed T-notes and T-bonds are eligible for the Treasury’s strip program. The Treasury does not issue strips directly to investors. Instead, financial institutions or registered dealers and brokers buy Treasury securities whole at auction and then create strip components to meet the demands of customers. To do this, the firms instruct the Treasury Department to electronically recode each coupon payment and the face value payment as a separate security in the book entry system. With this done, the firm now can sell the “new” strip securities individually or collectively in
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