Treasury STRIPS

They’re just government-backed zero coupon bonds. They pay no interest along the way…and then, at the very end, after being sold at a meaningful discount to par, they pay par, and everyone goes away happy. Ish.

STRIPS stands for:

Separate
Trading
Registered
Interest
Principal
Of Securities

STRIPS. Yeah, not nearly as exciting as you were hoping.

STRIPS became a thing in 1985, as the government’s zero-coupon vehicle of choice, replacing older forms of money raising. The basic idea was to feed an ever more complex hunger among investors wanting different flavors of debt food, and stripping principal in various forms helped to at least partially feed that beast. In this case, the coupons can be stripped from the principal. So, in the case of, say, 15-year paper, there are 31 elements of payment, or 31 payments to be made, where 30 of them are coupons, or semi-annual interest payments, and those can be packaged as one suite of product...and then there's a final payment of principal.

Investors can buy them separately or combined as it suits their needs. And you can imagine having just bought a building that carries a tax-deductible interest cost via debt procured to buy it. That interest cost to the company is $100 grand a month. In order to defease that interest cost, the company might also buy a STRIPS, where they are just buying the coupons from it for an offering that pays, say, 400 grand twice a year in stripped coupons. That way, $800k of the total $1.2 million owed in mortgage payments on the building are defeased, and the company only has to stress about the remaining 400 grand to cover their brand-spanking-new building interest costs.

At the other end of the liquidity spectrum, a company might not need any cash for 15 years, and they are happy just getting very safe, U.S. Government-backed interest in buying the principal at a discount, and then, 15 years later, getting back par.

Either way, it’s nice to have a little bit of cash left at the end of the day, especially if you’re planning to stop by the Zero-Coupon Bondage Parlor.