security created by separating the corpus, or bond principal, from the interest coupons, or interest payments. The stripping is done by a trust fiduciary. Principal payments are grouped together to make large denomination securities, and interest payments grouped with other interest payments of the same date to make other large securities, which are then sold to investors in smaller denominations. Separating the interest coupons effectively creates a zero-coupon security, a bond that pays no interest until maturity. An investor buying a ten-year $1,000 Treasury Bond, yielding 9%, pays $415 and at maturity receives the full face value of the bond.
In U.S. Treasury securities, there are two general classes of strip securities: so-called generic STRIPS, short for Separate Trading Of Registered Interest And Principal, which are direct obligations of the U.S. Treasury Department, and synthetic strips, which are sold through brokerage houses. U.S. Treasury securities actually are not stripped of coupon interest payments, but are sold at true discount. Zero-coupons issued by brokerage houses have such colorful acronyms as CATS (Certificate of Accrual on Treasury Securities, issued by Salomon Brothers), and TIGR (Treasury Income Growth Receipts, issued by Merrill Lynch.)
Bonds: brokerage-house practice of separating a bond into its corpus and coupons, which are then sold separately as zero-coupon securities. The 1986 Tax Act permitted municipal bond strips. Some, such as Salomon Brothers’ tax-exempt M-CATS, represent prerefunding backed by U.S. Treasury securities held in escrow. Other strips include Treasuries stripped by brokers, such as TIGERS, and stripped mortgage- backed securities of government-sponsored issuers like Fannie Mae. A variation known by the acronym STRIPS (Separate Trading of Registered Interest and Principal of Securities) is a prestripped zerocoupon bond that is a direct obligation of the U.S. Treasury.
Options: option contract consisting of two put options and one call options on the same underlying stock or stock index with the same strike and expiration date. Compare with strap.
Stocks: to buy stocks with the intention of collecting their dividends. Also called dividend stripping. See also dividend rollover plan.