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1.
All the following are benefits of STRIPS except _______.
Tax-free returns. Although STRIPS are eligible for tax-deferred retirement accounts, your earnings will be taxed as income at some point.
2.
Coupon stripping means separating a bonds _______ from its _______.
Interest / principal. Coupon stripping means separating a bonds interest from its principal and issuing separate securities based on each.
3.
Imagine that XYZ Brokers, Inc. issues STRIPS based on the semi-annual interest payments of a 10-year Treasury bond. How many different maturity dates will the STRIPS have?
20. Although 21 strips are created, each STRIP will have a different maturity date based on the date of the specific interest payment. The last interest strip will have the same maturity as the principal strip.
4.
If a zero coupon security were called, the holder would lose the interest the security would have paid.
False. Zero coupon securities cannot be called; they always pay face value at maturity, which makes them a source of reliable returns.
5.
STRIPS offer the safety of US Treasury securities without the high buy-in cost.
True. The cost of STRIPS is generally far lower than the minimum purchase requirement for US Treasury securities.
