Are STRIPS safe investments?
STRIPS are obligations of the Treasury and are backed by the full faith and credit of the United States. Market prices of STRIPS fluctuate more than the prices of fully constituted securities of the same maturity. The market price of a STRIP reflects the fact that there is only one payment on a specific date in the future. The market price of a fully constituted Treasury note or bond reflects the fact that there is a series of semiannual interest payments and a final payment at maturity. The longer the maturity of STRIPS, the greater is the potential market price fluctuation. STRIPS sell at a discount because there are no periodic interest payments. An investor’s income on a STRIP that is held to maturity is the difference between the purchase price and the amount received at maturity. Long-term STRIPS have lower market prices than short-term STRIPS, because long-term STRIPS accrue interest over a longer period of time. For example, assume that three STRIPS are quoted in the market at
