Future Business Leaders of America (FBLA) Securities and Investments Practice Test

What is a key feature of Treasury STRIPS?

1. They pay semiannual interest.

2. They are zero-coupon bonds.

3. They can only be held for 30 years.

4. They offer tax-exempt interest.

The correct answer is: They are zero-coupon bonds.

Treasury STRIPS, or Separate Trading of Registered Interest and Principal Securities, are a specific type of U.S. government debt that is issued in a way that allows the individual components of Treasury bonds – the principal repayment and the interest payments – to be sold separately as zero-coupon bonds. A fundamental characteristic of STRIPS is that they do not pay interest periodically like traditional bonds do; instead, they are sold at a discount to their face value, and the investor receives the full face value at maturity. This structure means that investors do not receive regular interest payments throughout the life of the STRIP but rather realize the yield at maturity when the bond matures. This zero-coupon nature of Treasury STRIPS makes them appealing for certain investors, particularly those looking for predictable payoffs at a specific time in the future or who want to match future liabilities with the bond's maturity. Investors are drawn to this feature as they can calculate the value of the investment over time, knowing the exact payout at maturity. While other characteristics of Treasury securities might include tax considerations or potential maturity timelines, they do not apply specifically to STRIPS in the context described in this question.