Products & Their RisksQuestion 133 of 398
Treasury STRIPS are best described as:
a.Short-term Treasury bills sold at face value
b.Zero-coupon securities created by separating the interest and principal payments of Treasury notes and bonds
c.Municipal bonds stripped of their tax exemption
d.Floating-rate agency notes
Explanation
STRIPS (Separate Trading of Registered Interest and Principal of Securities) are created when a Treasury security's coupon and principal payments are separated and sold individually as zero-coupon instruments. Each STRIP is bought at a discount and pays face value at maturity, with no periodic interest. They are backed by the U.S. government but carry phantom (imputed) taxable income each year.
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