Treasury STRIPS / Zero Coupon Bonds

In addition to Treasury securities, the U.S. Government also issues Treasury STRIPS, which represent the largest and most liquid segment of the Treasury zero coupon bonds marketplace.

Why are treasury zero coupon bonds attractive?

Treasury zero coupon bonds or just 'zeros' are generally sold at a deep discount to their face value. Unlike other bonds, zero coupon treasury bonds do not make periodic interest payments. Instead, “accreted interest” is considered to compound semi-annually at a stated fixed rate, and the treasury zero coupon bonds grow to its full value at maturity.

The difference between the bond’s face value and its discounted purchase price (the accreted interest) represents the investor’s return.

Who back the Treasury zero coupon bonds?

Like other Treasury securities, STRIPS or treasury zero coupon bonds are backed by the full faith and credit of the U.S. Government. STRIPS zero coupon treasury bonds are typically offered in $1,000 minimums and are available in over 130 different maturities.

What are other treasury zero coupon bonds?

Other treasury zero coupon bonds include receipt zeros (CATS, TIGRs, TRs, ETRs and COUGRs) and government agency zeros (REFCORPs, FICOs, FNMAs and FHLMCs), which are less liquid than STRIPS and offer federal agency credit quality.

Corporate zero coupon bonds

In addition, some corporations issue zero coupon bonds.

All of these securities are most appropriate in tax-deferred accounts, as the accredited interest is taxable each year, even though no such interest is actually paid. Consult your tax advisor for details.