One payment, separated from the original bond
A conventional Treasury note combines several promises: periodic interest and principal at maturity. STRIPS separate those payments into individually tradable securities. TreasuryDirect explains that each separated component makes a single payment at its own maturity. Transactions take place through financial institutions, brokers or dealers in the commercial book-entry system, rather than through a retail TreasuryDirect account. Eligible notes, bonds and TIPS can be stripped; bills and floating-rate notes cannot. [1]
The resulting claim is easier to describe than a coupon bond: a specified future payment has a price today. That simplicity can be misleading. A long wait for the payment makes the present value highly sensitive to the discount rate. The absence of interim coupons also means there is no cash distribution to spend or to help fund a tax bill along the way. A predictable maturity payment and a stable account statement are different objectives.
Following the payments
Consider an invented Treasury bond with $10,000 principal, a 4% annual coupon and exactly ten years remaining. It has twenty remaining semiannual coupons of $200, followed by return of the $10,000 principal alongside the final coupon. Stripping produces separate claims on those coupon dates and on the principal. An investor wanting the principal payment need not buy the earlier coupons as well. Treasury also permits reassembly when an intermediary obtains all the necessary remaining components. [1]
The arithmetic does not create additional government obligations. Before separation, total remaining nominal payments are $14,000: twenty times $200 plus $10,000. After separation, the combined payments are still $14,000. What changes is their packaging and the ability to buy or sell particular dates. Trading costs, market and differences in demand can keep observed component prices from matching a frictionless calculation exactly.
Pricing a future dollar
For a deliberately simplified annual-compounding example, suppose $10,000 is payable in ten years and the relevant annual discount rate is 4%. Present value is $10,000 divided by 1.04 raised to the tenth power, approximately $6,755.64. Paying that amount and receiving $10,000 ten years later corresponds to a 4% annual compounded return before fees and taxes. The $3,244.36 difference is earned over a decade, rather than being a one-year yield.
At a 5% discount rate, the same ten-year payment is worth approximately $6,139.13. At 3%, it is worth approximately $7,440.94. A one-percentage-point increase therefore reduces the initial value by about 9.13%; a one-point decrease raises it by about 10.14%. These are exact outputs of the stated simplified formula, not current STRIPS quotes. Actual Treasury quoting conventions, settlement dates and compounding require the appropriate market calculation.
Notice the asymmetry. The benefit from a rate decline is somewhat larger than the loss from an equally sized rate increase in this example. That curvature is convexity. A linear duration estimate is useful for a small move, but it is an approximation to a curved relationship. Calling a security low credit risk says little about the size of a rate-driven price change before maturity.
Why waiting concentrates duration
Macaulay duration measures the present-value-weighted timing of cash flows. For a zero-coupon payment, there is only one date, so this duration equals the remaining maturity. Under the annual-compounding assumptions above, modified duration is ten divided by 1.04, approximately 9.62. Multiplying by a 0.01 yield increase gives an estimated 9.62% price decline, close to but larger than the exact 9.13% decline. FINRA describes duration as a measure of sensitivity to interest-rate changes. [2]
A coupon bond with the same final maturity returns some value earlier. Its cash-flow-weighted timing is therefore shorter when yields and payments are positive. That does not establish which security has a better return. It establishes that two securities maturing on the same date need not expose their owners to the same price movement. Maturity labels conceal differences in the distribution of payments.
Matching a liability changes the relevant risk
Suppose a fictional institution owes exactly $100,000 in ten years and purchases enough fixed nominal STRIPS to deliver that amount on the matching date. At the assumed 4% annual rate, the purchase costs approximately $67,556.42. If rates rise immediately, the asset's market value declines. The obligation's discounted value also declines if evaluated using the same rate. The institution can still meet the specified nominal payment by holding to maturity, assuming the payment is made as promised.
That match is imperfect if the liability is actually uncertain. A tuition bill may rise with inflation, arrive earlier than expected or include additional expenses. An asset paying $100,000 does not automatically cover a liability that becomes $120,000. Nor does matching one date provide cash for emergencies before then. The usefulness of the match comes from the accuracy of the liability description, not simply from the government name on the asset.
Reinvestment risk moves rather than disappears entirely
A nominal zero has no interim coupons to reinvest. Its purchase-to-maturity compounded return therefore does not depend on finding a future reinvestment rate for coupon receipts. This is one reason a specific future payment can be convenient. FINRA's bond materials distinguish zero-coupon securities from bonds that distribute periodic interest. [3]
However, an investor who plans to reinvest the maturity proceeds faces whatever opportunities exist then. Someone contributing new money annually must also buy later payments at future prices. A ladder can distribute maturity dates, but it does not fix returns on purchases that have not yet occurred. Eliminating coupon reinvestment within one security is narrower than eliminating every reinvestment decision in a portfolio.
Taxable accrual without spendable cash
TreasuryDirect notes that STRIPS income generally must be reported in the year earned, even without an interim cash payment. IRS Publication 550 explains original-issue-discount treatment for stripped debt instruments and distinguishes accrual from cash distributions. Account type and the holder's tax circumstances matter; this article does not compute an individual's tax liability. [1][4]
In a simplified one-year illustration, a $6,755.64 opening tax basis accruing at 4% would generate about $270.23 of economic accretion, although the security pays no coupon. Actual taxable accrual uses applicable tax rules, acquisition details and periods rather than this rounded demonstration. Selling before maturity introduces another calculation involving sale proceeds and adjusted basis. Comparing two quoted yields without accounting for taxes, fees and cash needs can therefore miss a material difference.
The payment defines the exposure
The exact security identifier, payment date, face amount, executable price and yield convention define the claim. Whether it is fixed nominal or linked to a stripped TIPS component changes the analysis, as do an early sale, taxes and bid-ask spreads. TIPS-based components require their own inflation-adjustment analysis; the fixed-dollar examples here should not be copied onto them.
The central lesson is a separation of promises. STRIPS can isolate a Treasury payment and remove the need to reinvest coupons before that payment. They cannot promise a stable resale price, preserve purchasing power for a nominal claim, or make an uncertain future expense certain. Their strength and their principal price risk arise from the same feature: much of the economic value sits on one distant date.
Sources
- U.S. Treasury, STRIPS; checked October 4, 2026Official sourceBack to text: ↑1↑2↑3
- FINRA, Bonds: interest-rate risk and duration; checked October 4, 2026SourceBack to text: ↑
- FINRA-hosted NASD Notice 05-21, Appendix B zero-coupon explanation (historical educational material); checked October 4, 2026Source · PDFBack to text: ↑
- IRS Publication 550, stripped bonds and coupons; checked October 4, 2026Official sourceBack to text: ↑