Investing What Are Treasury STRIPS? Treasury STRIPS Explained By Brian O'Connor Brian O'Connor Brian O'Connor has over 40 years of experience as a writer covering investing, assets, markets, and more. He has written for The New York Times, The Wall Street Journal, CreditCards.com, Bloomberg News, and more. Brian has won awards for his writing and is a nationally syndicated columnist, editor, and author, and consultant for marketing and custom content. learn about our editorial policies Updated on April 30, 2022 Reviewed by Anthony Battle Reviewed by Anthony Battle Anthony Battle is a CERTIFIED FINANCIAL PLANNER™ professional. He earned the Chartered Financial Consultant® designation for advanced financial planning, the Chartered Life Underwriter® designation for advanced insurance specialization, the Accredited Financial Counselor® for Financial Counseling and both the Retirement Income Certified Professional®, and Certified Retirement Counselor designations for advance retirement planning. learn about our financial review board Fact checked by Heather van der Hoop Fact checked by Heather van der Hoop Website Heather van der Hoop (she/her) has been editing since 2010. She has edited thousands of personal finance articles on everything from what happens to debt when you die to the intricacies of down-payment assistance programs. Her work has appeared on The Penny Hoarder, NerdWallet, and more. learn about our editorial policies In This Article View All In This Article Definition and Example of STRIPS How STRIPS Work Pros and Cons of STRIPS Photo: PhotoAlto / Getty Images Definition U.S. Treasury STRIPS are individual securities that originate as pieces of a long-term Treasury bond. U.S. Treasury STRIPS are individual securities that originate as pieces of a long-term Treasury bond. STRIPS offer a one-time payment at maturity and don’t pay interest. They also can be traded on the secondary market. The Treasury doesn’t sell STRIPS directly to investors, but they can be purchased through dealers and brokers. STRIPS are a fixed-income vehicle that can be useful for investors who want to receive a fixed payment at a set time. However, any gains in value of a STRIP are taxable in the year they occur, regardless of whether the investment has matured. For this reason, STRIPS are well-suited to tax-deferred portfolios, such as individual retirement accounts (IRAs). Definition and Example of STRIPS Typically, a bond is made up of a series of interest payments capped by a final repayment of the principal used to purchase the bond. The individual interest payments are called “coupons” because bonds did at one time come with physical coupons that could be redeemed for a payment of interest. Digital technology has largely eliminated physical coupons today, but the term remains part of the investing lexicon. Note A STRIP, whose acronym comes from the instrument’s full name, “Separate Trading of Registered Interest and Principal of Securities,” is created by taking a Treasury bond with 10 years or more until maturity and breaking it down into individual bonds. They were introduced to the market in 1985. These new bonds generate one payment at maturity and no interest payments, categorizing them as so-called zero-coupon bonds. In the case of a 10-year Treasury bond making semiannual interest payments, the bond would be divided into 20 individual bonds for the 20 interest payments, and another bond for the repayment of the bond principal. These 21 new bonds are STRIPS, with all of them having fixed, one-time payments on fixed dates. They are sold at a discount that varies according to the amount of time to maturity. STRIPS can be traded in the secondary market before they mature. How STRIPS Work STRIPS can be considered for the fixed-income portion of your portfolio like any other bond because a STRIP essentially is a bond created from another bond. The minimum investment in STRIPS is $100, making them affordable for individual investors who don’t want to tie up a lot of cash. STRIPS can be good for an investor who wants a fixed payment at a fixed date and wants to know exactly how much income will be produced. Following conventional investment theory, most investors younger than 40 benefit more by focusing on all-stock portfolios, so will likely want to skip STRIPS with their lower returns until they start adding bonds to their portfolios as they age. Because STRIPS are derived from long-term Treasury bonds, they’re considered very low risk but if interest rates increase, the value of STRIPS will fall in the secondary market, although that’s not a consideration for investors holding the bond until maturity. If inflation takes off, however, the yield of the STRIPS might not keep pace with inflation, no matter how long the bond is held. Note In addition to the bonds themselves, there are several exchange-traded funds (ETFs) that track a basket of STRIPS, which can offer more flexibility and trading options than directly holding STRIPS. These ETFs include the iShares 25+ Year Treasury STRIPS Bond ETF (GOVZ); the Vanguard Extended Duration Treasury Index Fund ETF (EDV), which tracks the Bloomberg U.S. Treasury STRIPS 20–30 Year Equal Par Bond Index; and the Pimco 25+ Year Zero Coupon U.S. Treasury Index ETF (ZROZ), which tracks the BofA Merrill Lynch Long Treasury Principal STRIPS Index. Because STRIPS can incur tax charges before maturity, they are most attractive to investors with tax-deferred accounts, such as IRAs. Interest on STRIPS is required to be reported in the year it’s earned even though the bondholder doesn’t receive any payment until the maturity date. Nonetheless, STRIPS could be useful in some taxable accounts for which tax management strategies are in place. Pros and Cons of STRIPS Pros Stable income Relatively affordable Relatively affordable Cons Have to purchase through a third party Low returns Value can decrease if interest rates rise Pros Explained Stable income: STRIPS are nonvolatile and dependable, with a set payment on a fixed date, if held to maturity.Relatively affordable: STRIPS are affordable for individual investors, with a minimum entry price of $100.Liquid: STRIPS offer good liquidity in the secondary market for investors who don’t want to hold the bonds to maturity. Cons Explained Have to purchase through a third party: STRIPS aren’t sold directly to investors but must be purchased over-the-counter from a broker or investment company. Minimal returns: Being low-risk, zero-coupon Treasury bonds, STRIPS don’t pay a high rate of interest. Value can decrease if interest rates rise: The value of a STRIPS can fall in the secondary market if interest rates rise, and the yield on a STRIPS might not keep up with inflation. Key Takeaways STRIPS are bonds that make a fixed, one-time payment on a set date.STRIPS are created by selling individual pieces of larger long-term Treasury bonds.STRIPS can be affordable, with a minimum purchase of $100, but any increases in value are taxable when earned, not when the bond matures, which can be avoided by putting STRIPS in tax-deferred accounts.STRIPS can’t be purchased directly from the U.S. Treasury but are sold over-the-counter through dealers. Strips can be sold and purchased this way in the secondary market, and there are several ETFs that track indexes of STRIPS. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Morningstar. "How Do STRIPS Work?" Accessed Oct. 18, 2021. TreasuryDirect. "Individual—Timeline of Separate Trading of Registered Interest and Principal Securities (STRIPS)." Accessed Oct. 18, 2021. TreasuryDirect. "STRIPS." Accessed Oct. 18, 2021. Yahoo! Finance. "PIMCO 25+ Year Zero Coupon U.S. Treasury Index Exchange-Traded Fund." Accessed Oct. 18, 2021. Yahoo! Finance. "Vanguard Extended Duration Treasury Index Fund ETF Shares (EDV)." Accessed Oct. 18, 2021.