LOS c: Describe how stripped Treasury securities are created and distinguish between coupon strips and principal strips.

Q1. Which of the following statements about the taxation of separate trading of registered interest and principal of securities (STRIPS) is FALSE?

A)   Implicit interest taxation is a paramount issue for pension plans.

B)   The STRIPS program began in 1985.

C)   Treasury STRIPS can be based upon either coupon payments or principalpayments.

Q2. Which of the following statements about Treasury securities is FALSE?

A)   The U.S. Treasury auctions 10-year Notes weekly.

B)   Designated government securities dealers can buy treasuries, strip out the coupons and principal, and reissue these stripped cash flows as zero-coupon bonds.

C)   Taxable investors holding zero-coupon bonds can have negative cash flows prior to maturity.

Q3. Which of the following statements regarding separate trading of registered interest and principal of securities (STRIPS) is TRUE? A 20-year Treasury bond can be used as the basis for:

A)   40 principal strips and 1 coupon strip.

B)   41 coupon strips.

C)   40 coupon strips and 1 principal strip.

Q4. Which of the following refers to the U.S. Treasury bonds that are sold in the form of zero-coupon securities?

A)   Treasury calls.

B)   Strip-Ts.

C)   Pass-throughs.

LOS c: Describe how stripped Treasury securities are created and distinguish between coupon strips and principal strips.fficeffice" />

Q1. Which of the following statements about the taxation of separate trading of registered interest and principal of securities (STRIPS) is FALSE?

A)   Implicit interest taxation is a paramount issue for pension plans.

B)   The STRIPS program began in 1985.

C)   Treasury STRIPS can be based upon either coupon payments or principalpayments.

Correct answer is A)        

Pension plans are not taxable entities so they do not have to worry about implicit interest taxation. Both of the other statements are true.

Q2. Which of the following statements about Treasury securities is FALSE?

A)   The U.S. Treasury auctions 10-year Notes weekly.

B)   Designated government securities dealers can buy treasuries, strip out the coupons and principal, and reissue these stripped cash flows as zero-coupon bonds.

C)   Taxable investors holding zero-coupon bonds can have negative cash flows prior to maturity.

Correct answer is A)        

U.S. Treasury Notes are issued quarterly. Both of the other statements are true. It is possible that taxable investors will have negative cash flows from holding zero-coupon securities, since there is no cash income, but taxes must be paid at least annually on the implicit interest.

Q3. Which of the following statements regarding separate trading of registered interest and principal of securities (STRIPS) is TRUE? A 20-year Treasury bond can be used as the basis for:

A)   40 principal strips and 1 coupon strip.

B)   41 coupon strips.

C)   40 coupon strips and 1 principal strip.

Correct answer is C)

A 20-year Treasury bond can be used as the basis for 40 coupon strips and 1 principal strip.

Q4. Which of the following refers to the U.S. Treasury bonds that are sold in the form of zero-coupon securities?

A)   Treasury calls.

B)   Strip-Ts.

C)   Pass-throughs.

Correct answer is B)

The U.S. Treasury does not issue zero coupon notes and bonds, therefore investment bankers began stripping the coupons from Treasuries to create synthetic zeros to meet investor demand. The Separate Trading of Registered Interest and Principal Securities (STRIP) was introduced in 1985 to meet this need.

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LOS e,