The Stripping of U.S. Treasury Securities

Abstract

This monograph traces the early development of the U.S. Treasury strips market. The stripping of U.S. Treasury securities began in 1982 as a private market. In 1985, the U.S. Treasury began to allow dealers to strip Treasury securities and in 1987 the Treasury permitted reconstitution of strips into the underlying bonds. The taxation of Treasury bonds and strips is examined. Except in the case of a flat after-tax term structure of interest rates, the after-tax value of a bond is shown to be different from the after-tax value of a portfolio of strips with the same pretax future cash inflows.

Keywords: STRIPS, Taxation

JEL Classification: G12, G23