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1.
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.
2.
STRIPS are sold by the US Treasury.
False. While backed by receipts for US Treasury securities, the STRIPS themselves are created and sold by brokerage firms.
3.
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.
4.
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.
5.
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.
