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Bonds 206: STRIPS

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1.
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.
2.
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.
3.
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.
4.
STRIPS are sold by the US Treasury.
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False. While backed by receipts for US Treasury securities, the STRIPS themselves are created and sold by brokerage firms.
5.
All the following are benefits of STRIPS except _______.
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Tax-free returns. Although STRIPS are eligible for tax-deferred retirement accounts, your earnings will be taxed as income at some point.