JRossSter

koba Wrote:
-------------------------------------------------------
> hi All,
> i'm a bit confused. according to the CFA1
> Curriculum Vol 5, Reading 64, page 455, "Treasury
> STRIPS", "...the U. S. Department of the Treasury
> doesn't issue zero-coupon treasury securities
> with maturity greater than one year". But
> government dealers can do that-they separate the
> "coupon payments and the principal payment ..."
>
> my questions are: (1) are those securities thus
> issued (by the gov't dealers) no more
> "zero-coupon" securities? (2) if they are, why
> are they "stripped" into "coupon payments" and
> "principal payment"? (they are "zero-coupon"
> securities, so why "coupon payments"?) or does the
> "stripping" process change those securities from
> "zero-coupon" to "coupon-paying" securities?
>
> koba

(1) exactly, the government issues only coupon paying securities when maturity > 1 year
(2) Each strip or the principle as a separate piece represents a single payment, hence a zero-coupon bond. the stripping process change those securities from a coupon paying security to zero-coupon paying securities.

example. 2 year 5% Treasury bond semiannually could be stripped into 5 zero-coupon bonds:
1 5% zero coupon bond with 0.5 year maturity
1 5% zero coupon bond with 1.0 year maturity
1 5% zero coupon bond with 1.5 year maturity
1 5% zero coupon bond with 2.0 year maturity
1 100% zero coupon bond with 2.0 year maturity