The Treasury security where the final principal payment is detached from periodic interest payments is categorized as ___________?
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Answer: A. STRIP
Explanation
A Treasury security where the principal payment is detached from coupon payments is known as a STRIP security. Financial institutions separate the individual interest coupons from the final principal repayment obligation. Each detached component trades as an independent zero coupon instrument in the secondary financial markets. STRIPS stands for Separate Trading of Registered Interest and Principal of Securities issued by the Treasury. The Department of Treasury facilitates this separation process through the federal book entry system. Zero coupon instruments do not pay periodic interest but are sold at deep discounts to their face value.
Pension funds utilize STRIPS to eliminate reinvestment rate risk and match future liability obligations precisely. Individual investors purchase principal STRIPS to secure guaranteed lump sum payouts maturing on specific dates. The secondary market for stripped Treasury components provides high liquidity and precise yield curve pricing. Separated security is a descriptive phrase but lacks the official market acronym used for Treasury STRIPS. Inflated security incorrectly implies a direct link to inflation protection mechanisms like TIPS bonds. Coupon paid security is an inaccurate terminology that contradicts the zero coupon nature of stripped components.
- Subject
- Accounting and Finance
- Category
- Finance
- Topic
- —
- Difficulty
- medium
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