Treasury STRIPS

Finance allah shmoop What are strips Well they're just government

back zero coupon bonds They pay no interest along the

way And then at the very end after being sold

at a meaningful discount to par well they pay far

and everyone goes away Happy ish All right well strips

stands for separate trading Registered interest principle of securities strips

Yeah and not nearly as exciting as you were hoping

right Well strips became a thing in nineteen eighty five

as the government zero coupon vehicle of choice Replacing older

forms of money raising The basic idea was to feed

and ever more complex hunger among investors wanting different flavors

of debt food and stripping principle in various forms Help

to at least partially feed that beast well in this

case the coupons can be stripped from the principle So

in the case of say fifteen year paper there are

thirty one elements of payment or thirty one payments to

be made where thirty of them are coupons or semi

annual interest payments And those can be packaged as one

suite of a product And then there is a final

payment of principle That's the thirty first flavor there you

know like baskin robbins you know investors can buy them

separately or combined as it suits their needs And you

can imagine having just bought a building which carries a

tax deductible interest costs via debt procured to buy it

That interest cost to the company's in one hundred grand

a month Well in order to defeat ease that interest

costs five dollar word there The company might also by

strips where they're just buying the coupons from it for

an offering that pace a four hundred grand twice a

year in stripped coupons Well that way eight hundred thousand

boxes with one point two million owed in those monthly

pay payments on the building are defused and the company

only has to stress about the remaining four hundred grand

to cover their brand spanking new building interest costs Well

at the other end of the liquidity spectrum a company

might not need any cash for fifteen years and they're

happy just getting very safe Us government backed interest in

buying the principal at a discount and then fifteen years

later cashing in getting the cash getting back to par

Well either way it's Nice to have a little bit

Of cash left at the end of the day Especially

if you're planning to stop by the zero coupon bondage

parlor That's A different kind of stripping But we didn't

go there because we're just doing fifty shades of shmoop 00:02:20.83 --> [endTime] here A while