Treasury STRIPS are fixed-income securities that are sold at a significant discount to face value, but don't offer interest payments, due to the fact that they mature at par. With these instruments, an investor's return is determined by calculating the difference between the purchase price and the bond's trading value face value if held to maturity. Backed by the U. Although STRIPS investors don't receive tangible incomes, they nevertheless are obligated to pay federal income tax on the bond's accretion for the year. However, these securities can be bought by private brokerages.
When a Treasury fixed-principal note or bond or a Treasury inflation-protected security TIPS is stripped through the commercial book-entry system each interest payment and the principal payment becomes a separate zero-coupon security. Each component has its own identifying number and can be held or traded separately. For example, a Treasury note with 10 years remaining to maturity consists of a single principal payment, due at maturity, and 20 interest payments, one every six months over a 10 year duration. When this note is converted to STRIPS form, each of the 20 interest payments and the principal payment becomes a separate security. STRIPS components can be reassembled into a fully constituted security in the commercial book-entry system. To reconstitute a security, a financial institution or government securities broker or dealer must obtain the appropriate principal component and all unmatured interest components.
Though the Federal Reserve now assists with the logistics of creating and servicing these bonds, the supply of STRIPS is still exclusively controlled by private dealers. Long-dated STRIPS — the most prevalent type being created  — are often purchased as a means of adding duration in a liability hedging context. Outside of derivatives, they are one of the most capital efficient ways to add interest rate duration, so typical buyers of STRIPS include corporate defined-benefit pensions and life insurers with USD liabilities.
Fed Education. Book-Entry Procedure. What We Do Fedwire. Zeros sell at discounts from face value. The difference between the purchase price of the zero and its face value when redeemed is the investor's return.