Stripping

The US Treasury department does not issue zero coupon securities with a maturity date of more than 1 year.
There are two ways around this:


1) Financial Institutions Issuing Receipts
They can create these types of products by purchasing treasury coupon securities and issuing receipts for each coupon payment as well as a recipt for the par value.


2) Treasury STRIPS program
This is a separation of each coupon payment as well as the principal to create treasury strips that are direct obligations of the US Treasury.




This method is known as stripping and the contracts are known as Strip Bonds.
STRIPS stands for Separate Trading of Registered Interest and Principal Securities.
Take an ordinary bond and remove the voupons, making it a zero coupon bond. This is called strpping the bond (very common with US Terasury's)


Investment banks or dealers can separate the coupons from their bond principal, which is known as the Residue.
This is so one investor can receive the principal while other investors receives the coupons.
This creates a supply of new zero coupon bonds.


Coupons have been stripped off and all the coupons are sold separately
These were popular when there was arbitrage opportunities, not really used so much now though.





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