The US Treasury does not issue zero-coupon securities with maturities greater than a year, but it has a program whereby the coupon and principal payments of standard Treasury securities can be disaggregated and traded separately as zero-coupon securities. This is called the STRIPS program, which the Treasury launched in 1985. STRIPS stands for Separate Trading of Registered Interest and Principal of Securities. Under the program, a financial institution can present the Treasury with a standard Treasury note, Treasury bond or TIPS to be "stripped." The Treasury disaggregates the individual cash flows into separate securities, which are returned to the financial institution. For example, a newly issued 5-year note would be stripped into eleven separate securities—ten representing the note's semiannual coupon payments, and one representing its final principal payment. The new securities are called coupon strips and principal strips. Collectively, they are called Treasury strips or just strips. To an investor, there is no practical difference between a coupon strip and a principal strip. Both are zero-coupon Treasury securities. But there is a technical difference. Each issue of Treasury securities is identified with a unique CUSIP number. When a note or bond is stripped, each new security receives a different CUSIP. Coupon strips maturing on the same date, even if they are stripped from different issues of notes or bonds, are given the same CUSIP. This makes them fungible. The principal strips are each given a unique CUSIP identifying it with the particular note or bond issue from which it was stripped. This is important because, in addition to disaggregating securities under the STRIPS program, the Treasury will also reconstitute them. A financial institution must obtain the principal strip for the security to be reconstituted (identified by CUSIP) as well as coupon strips maturing on all that security's coupon dates. The Department of Treasury takes these and returns the reconstituted security. TIPS are handled similarly. Coupon strips that mature on the same date are all given the same CUSIP, although this differs from the CUSIP of note or bond coupon strips maturing on that date. The principal strip for each TIPS is given a unique CUSIP identifying it with the particular TIPS issue from which it was stripped. They too can be reconstituted. There is an active market for note and bond strips. These are widely held by both institutional and retail clients. There is little liquidity in TIPS strips. See the article Treasury Securities for more information on the secondary market for Treasuries.
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