Series 7 practice questionmediumDebt Securities — US Government — STRIPS
STRIPS (Separate Trading of Registered Interest and Principal of Securities) are best described as:
- AFloating-rate Treasury securities
- BZero-coupon securities created by separating Treasury bond interest and principal into individual components✓ Correct answer
- CMunicipal bonds backed by Treasury securities
- DTreasury bills with extended maturities
Explanation
Why B — Zero-coupon securities created by separating Treasury bond interest and principal into individual components
STRIPS are created when a Treasury note or bond is separated into its individual interest payments and principal repayment, each of which is then sold as a separate zero-coupon security. For example, a 10-year Treasury bond can be stripped into 20 semi-annual coupon payments and one principal payment, creating 21 individual zero-coupon securities. STRIPS are backed by the full faith and credit of the US government.
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