Legal Definitions - separate trading of registered interest and principal of securities

Definition: Separate Trading of Registered Interest and Principal of Securities (STRIPS) is a type of Treasury security that allows investors to buy and sell the individual components of a bond separately. This means that the owner of a STRIP will receive either the principal or interest payments, but not both.

Example: Let's say an investor purchases a 10-year Treasury bond with a face value of $10,000 and an annual interest rate of 2%. The bond will pay out $200 in interest each year for 10 years, and then return the $10,000 principal at maturity. However, if the investor decides to convert the bond into STRIPS, they can sell the interest payments and principal separately. For example, they could sell the $200 annual interest payments to one investor and the $10,000 principal payment to another investor.

Explanation: This example illustrates how STRIPS allow investors to separate the interest and principal components of a bond and trade them separately. By doing so, investors can customize their investments to meet their specific needs and preferences. For example, an investor who needs regular income might choose to buy the interest payments, while an investor who wants a lump sum payment at maturity might choose to buy the principal payment.