Definition of Treasury Strips

"STRIPS" stands for "Separate Trading of Registered Interest and Principal Securities." "Treasury STRIPS" are a form of fixed-income security sold at a significant discount from face value. In contrast to a normal Treasury note or bond, which consists of a principal payment and semiannual interest payments, STRIPS offer no interest payments because they mature at par. For example, a 30-year Treasury bond for $1,000 consists of 60 interest payments - one every six months for 30 years - and a principal payment of $1,000 when the bond matures. If this bond gets stripped of its interest (i.e., coupon) payments, it becomes a "zero-coupon" bond. The owner doesn't get paid any interest but buys the right to repayment of the principal - $1,000 - at a deep discount to the face value. Treasury STRIPS are minimal risk investments and they do offer some tax advantages in certain states. However, the primary reason for investing in Treasury STRIPS is to ensure a certain payment amount at a future date, such as retirement at age 65.