Treasury STRIPS Program

Treasury STRIPS Program (Separate Trading of Registered Interest and Principal Securities)
The U.S. government does not issue zero coupon notes and bonds and there is a strong demand for an instrument with no credit risk and a maturity of greater than one year.

These securities come in two different forms:

Coupon Strips
Coupon strips come from the coupon payment part of the security.

Principal Strips
Principal strips come from the principal payment.

Coupon strips accrue interest and are taxed each year even though interest is not paid until maturity. This causes negative cash flows for a taxable entity. Foreign investors often like principal strips because of the preferred tax treatments they can receive in their home countries.