Separate Trading of Registered Interest and Principal of Securities ( STRIPS )

You can buy, hold, sell, and redeem STRIPS only through a financial institution, a broker, or dealer who handles government securities.

Treasury securities with a fixed-principal, such as notes, bonds, and TIPS are eligible and may be stripped. Bills and FRNs can’t be stripped.

The idea of STRIPS is that the principal and each interest payment become separate securities that are treated individually.

Each separated piece is a zero-coupon security that matures separately and, has only one payment.

An example

A bond with 10 years remaining to maturity consists of:

• a single principal payment due at maturity, and
• twenty interest payments, one every six months over the next 10 years

When this bond is stripped, the principal payment and each of the 20 interest payments becomes a separate security. The one original security is now 21 separate new securities with unique Committee on Uniform Securities Identification Procedures (CUSIPs). All new security pieces pay at maturity.

STRIPS par value must be in multiples of $100

The minimum face amount needed to STRIP is $100, and any par amount above that minimum must be a multiple of $100.

A stripped security may also be reassembled

A stripped security may be reassembled into a single security if the financial institution, broker, or dealer gets all the remaining separate pieces of the original security.

The example again

Five years later, the stripped bond now has five years remaining to maturity. It consists of:

• the single principal payment due at maturity, and
• ten interest payments, one every six months over the next five years

There are 11 STRIPS with unique CUSIPs left for the bond.

To reassemble the bond, the financial institution, broker, or dealer must have all 11 STRIPS.

When the bond is reassembled, it will again have a single CUSIP number.

Stripping and reassembling are done in the commercial book-entry system

Financial Institutions, brokers, and dealers use the commercial book-entry system to hold Treasury marketable securities on behalf of investors. Because you can’t strip or reassemble in TreasuryDirect or Legacy Treasury Direct, all STRIPS are held in the commercial book-entry system and stay there when reassembled.

Each STRIPS is subject to taxes in the same way as the entire security

Interest earned on STRIPS and inflation adjustments on TIPS principal must be reported in the year in which they are earned.

The financial institution, broker, or dealer who holds your STRIPS will send you an IRS Form 1099 each year with your tax-related information.

For more information

If you have questions about STRIPS, contact your financial institution, broker, dealer, or investment advisor.

For the regulations relating to stripping and reassembling Treasury securities, see 31 CFR 356.31.

If you are a financial institution, broker, or dealer and have specific questions on the process for stripping or reassembling Treasury securities, call the Federal Reserve Bank of New York at 201-531-3894.

For further information on the tax treatment of STRIPS, see IRS Publication 550, Investment Income and Expenses.

For government agencies: How to record STRIPS

For the principal payment: The stripped principal component of a security will be recorded at book value. Book value is the par value of a security minus the amount of any unamortized discounts or plus the amount of any unamortized premiums.

For the interest payments (TINT): The stripped interest component (TINT) of a security represents future interest payments due and will be recorded as accrued interest six months before maturity.

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