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Simple English definitions for legal terms
separate trading of registered interest and principal of securities
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A quick definition of separate trading of registered interest and principal of securities:
Term: Separate Trading of Registered Interest and Principal of Securities
Definition: When you buy a bond or treasury security, you are essentially lending money to the government or a corporation. The bond pays interest on the money you lend and returns the principal amount when the bond matures. However, with Separate Trading of Registered Interest and Principal of Securities (STRIPS), the bond is split into two parts: the interest payments and the principal amount. This means that investors can buy and sell the interest payments and principal separately, allowing for more flexibility in managing their investments.
A more thorough explanation:
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.