Separate Trading of Registered Interest and Principal Securities / STRIPS is a zero coupon bond, issued by the US Government. The principal payment due in the future is sold to investors at a discount and appreciates to par at maturity. The interest payment component is sold to other investors who want some current income.
Treasury STRIPS are issued by the US Government. The underlying asset is a treasury bond, and the US Treasury seperates the principal portion from the interest portion, then discounts each and sells them to investors at a discount. Since they are sold at a discount STRIPS do not pay semiannual interest to the investor, the discount from par is the investors return on the investment. They are considered to be very safe investments, and are often chosen by investors who need a specific amount of money at a specific point in time ex: to fund a child’s college education.
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