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Bonds 206: STRIPS

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1.
Under the book entry system, the brokerage does not hold certificates to the securities it buys.
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True. Under the book entry system, the Treasury records the firms ownership of the bond or note, but no actual certificate is exchanged.
2.
Any US Treasury security is eligible for STRIPS.
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False. Only Treasury securities with maturities of 10 years or longer are eligible for STRIPS.
3.
Coupon stripping means separating a bonds _______ from its _______.
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Interest / principal. Coupon stripping means separating a bonds interest from its principal and issuing separate securities based on each.
4.
Zero coupon bonds issued by brokerages based on receipts for US Treasury instruments are known as ________.
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STRIPS. The others are examples of securities created prior to the STRIPS system by brokerages that stripped coupons from Treasury securities they bought and held in escrow.
5.
If a zero coupon security were called, the holder would lose the interest the security would have paid.
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False. Zero coupon securities cannot be called; they always pay face value at maturity, which makes them a source of reliable returns.