Treasury STRIPS take a note or bond apart. Every remaining coupon and the final principal payment become separate securities, each paying a single amount on a single date, and each sells at a discount that shrinks as that date approaches. The result is the plainest form of Treasury debt: no coupons to reinvest, a known sum on a known day, and the biggest price swings in the Treasury market. This guide covers how STRIPS are created, how to price one from its yield, why their prices move so much and how the IRS taxes interest you have not yet received. For the securities STRIPS come from, see Treasury notes explained and Treasury bonds explained, or start at the US Treasuries hub.
What are Treasury STRIPS?
STRIPS are zero-coupon Treasury securities: each one pays a single amount on a single date and is bought at a discount to that amount.
The name stands for Separate Trading of Registered Interest and Principal of Securities. Take a bond with 10 years left: it owes one principal payment at maturity and 20 semiannual coupons. Stripped, it becomes 21 separate securities. The principal piece, or principal STRIPS, keeps a CUSIP linked to the original security; when Treasury announced the August 2026 30-year bond, for example, it also listed 912803HX4 as the CUSIP its principal STRIPS would carry. The coupon pieces, or interest STRIPS, are grouped by payment date: every interest piece due on the same day shares one CUSIP and is interchangeable, whichever note or bond it came from, though pieces stripped from TIPS form a separate pool.
Treasury does not auction STRIPS. Any note, bond or TIPS can be stripped, but bills and floating rate notes cannot. The pieces are still Treasury obligations, paid by the US government on their dates, and you buy, hold and sell them only through a bank, broker or dealer.
How are STRIPS created from notes and bonds?
A bank or dealer asks the Federal Reserve's securities system to strip an eligible note or bond, and it is split into separate pieces in real time.
Stripping is the holder's choice and can happen at any point in a security's life. A participant in the Fedwire Securities Service sends the security to the Federal Reserve Bank of New York's STRIP account, and the system hands back the principal and interest pieces. Since October 10, 2017 those requests have been processed in real time rather than in batches, and they must reach the service by 1:30 p.m. Eastern on a business day. A security can be stripped in amounts of $100 face value and multiples of $100.
The process also runs backward. A dealer that collects the principal piece and every remaining interest piece of a security can have it reconstituted into the original note or bond. Dealers strip when the pieces are worth more sold separately than the whole, and reconstitute when the reverse is true, which keeps STRIPS prices in line with the securities they come from.
Most stripping happens at the long end. The Monthly Statement of the Public Debt shows how much of each type sat in stripped form at the end of September 2026:
| Security type | Outstanding | Held in stripped form | Share stripped |
|---|---|---|---|
| Notes | $16.28 trillion | $22.6 billion | 0.1% |
| Bonds | $5.55 trillion | $607.4 billion | 10.9% |
| TIPS | $2.17 trillion | $12.5 million | under 0.01% |
| Total | $24.01 trillion | $630.0 billion | 2.6% |
Bonds account for about 96% of everything held in stripped form, which reflects who wants zeros: buyers looking for long, single payments, as the section on uses explains.
How do you price a STRIPS from its yield?
Discount the single payment back to today: price equals face value divided by one plus half the yield, raised to the number of half-years left.
STRIPS yields are quoted with semiannual compounding, the same convention as note and bond yields, so the formula is:
Worked example: Pricing a 10-year STRIPS from its yield
Suppose a dealer offers a principal STRIPS maturing in exactly 10 years at a yield of 5.00%. That is an illustrative figure: actual STRIPS yields vary by issue, and the 10-year par yield on Treasury's curve was 4.94% on October 30, 2026.
- Half-year periods to maturity: 10 × 2 = 20
- Growth factor: 1.025 to the 20th power = 1.638616
- Price for $10,000 face: $10,000 ÷ 1.638616 = $6,102.71, or about 61.03 per $100
- Payoff at maturity: $10,000, so the full $3,897.29 of return arrives on one day
- Working backward from the price: 2 × (1.638616 to the power 1/20 − 1) = 5.00%
The same math gives the deep discounts on longer pieces. At an assumed 5.40% yield, close to the 20- and 30-year par yields on October 30, 2026, $10,000 of face value due in 20 years costs about $3,444.94, and $10,000 due in 30 years about $2,021.96, roughly 20 cents on the dollar. Nothing else in the Treasury market lets you lock in a sum three decades away for so little up front, which is exactly why the price is so sensitive.
Why do STRIPS prices swing more than coupon bonds?
A STRIPS returns all its money on one far-off date, so its duration is essentially its full term, while a coupon bond's duration is shortened by its coupons.
A coupon bond hands back part of its value every six months, and those early payments are barely affected by a change in long-term yields. A STRIPS has no early payments, so a change in yield hits the whole value. The table compares a STRIPS with a coupon security of the same maturity priced at par, using the same illustrative yields:
| Security and yield | Modified duration | Yields rise 1 point | Yields fall 1 point |
|---|---|---|---|
| 10-year STRIPS at 5.00% | 9.8 | −9.3% | +10.3% |
| 10-year coupon note at par, 5.00% coupon | 7.8 | −7.4% | +8.2% |
| 30-year STRIPS at 5.40% | 29.2 | −25.3% | +34.0% |
| 30-year coupon bond at par, 5.40% coupon | 14.8 | −13.3% | +16.6% |
At 10 years the STRIPS moves about a quarter more than the note. At 30 years it moves about twice as much as the bond: a 1-point rise would take $10,000 of face value from $2,021.96 to $1,510.84. The gains on falling yields are larger than the losses on rising ones, and zeros have more of that curvature, called convexity, than any coupon security. Why bond prices fall when rates rise explains duration and convexity in general, and bond duration defines the measure.
How are STRIPS taxed if they pay no interest?
The IRS treats the discount as original issue discount, so federal tax is due each year on interest that builds up, even though nothing is paid until maturity.
IRS Publication 550 lists Treasury STRIPS among stripped bonds and coupons. When you buy one, you treat it as if it were newly issued on your purchase date, and the difference between its face value and your price is original issue discount (OID). You include part of that OID in income every year using the constant yield method set out in Publication 1212: each period's OID equals your adjusted purchase price times the yield to maturity divided by the number of periods per year. Each amount you report also raises your tax basis, so you are not taxed on it again at maturity. People often call this phantom income, because the tax is real but the cash is not.
Worked example: Phantom income on the 10-year STRIPS bought for $6,102.71
| Year held | Value at start | OID taxed for the year | Value at end |
|---|---|---|---|
| 1 | $6,102.71 | $308.95 | $6,411.66 |
| 2 | $6,411.66 | $324.59 | $6,736.25 |
| 3 | $6,736.25 | $341.03 | $7,077.28 |
| 4 | $7,077.28 | $358.29 | $7,435.57 |
| 5 | $7,435.57 | $376.43 | $7,812.00 |
| 6 | $7,812.00 | $395.48 | $8,207.48 |
| 7 | $8,207.48 | $415.51 | $8,622.99 |
| 8 | $8,622.99 | $436.53 | $9,059.52 |
| 9 | $9,059.52 | $458.64 | $9,518.16 |
| 10 | $9,518.16 | $481.84 | $10,000.00 |
- First half-year: $6,102.71 × 2.5% = $152.57; second: $6,255.28 × 2.5% = $156.38; year one total $308.95
- Federal tax on year one at a 24% bracket: $74.15, or $98.86 at 32%, paid from other money
- Total OID over 10 years: $3,897.29, all of it taxed before or at maturity
Real tax years rarely line up with your purchase date, so the first and last calendar years usually include only part of a year's OID. Your broker reports OID on Form 1099-OID, with the amount on Treasury obligations in box 8, but its figure may not match your own purchase price; the IRS asks you to refigure it in that case. Treasury interest, including STRIPS OID, remains exempt from state and local income tax. Tax rules change and depend on your situation, so a tax professional can confirm how these rules apply to you, and are T-bills taxable? covers Treasury tax reporting more broadly.
What are STRIPS used for?
STRIPS are built for a known sum on a known date, which is why savers funding a future expense and pension funds and insurers matching long-dated promises use them.
- A known future expense. Someone facing a tuition bill or a balloon payment in a set year can buy a STRIPS maturing just before it. The amount is fixed and there are no coupons to reinvest along the way.
- A zero-coupon ladder. One STRIPS maturing in each of several years creates a schedule of lump sums, much like a T-bill ladder stretched over decades.
- Matching long liabilities. Pension plans and insurers that owe payments far in the future can line up STRIPS against them; the heavy stripping of bonds reflects that demand for long, single payments.
- Inflation-linked lump sums. Principal STRIPS from TIPS grow with inflation, and Treasury's rules give only those principal pieces the floor that guarantees at least their original par value at maturity; interest pieces from TIPS get no such floor. TIPS explained covers the inflation mechanics.
- Tax-sheltered accounts. Inside an IRA there is no yearly tax on the accruing interest, so the phantom income problem disappears; T-bills in an IRA covers what changes inside a retirement account.
Some traders also use long STRIPS to bet on falling rates, precisely because the price moves so much. That cuts both ways, and the next section covers the downside.
How do you buy Treasury STRIPS?
You buy STRIPS through a bank or brokerage, from its inventory or on the secondary market; Treasury does not sell them and TreasuryDirect cannot hold them.
Brokers usually quote a STRIPS by its price per $100 of face value and its yield to maturity. Because many pieces trade less often than new notes and bonds, the gap between the price you pay and the price you could sell for can be wider, especially on small orders.
Before you buy a STRIPS
- Confirm whether it is a principal or an interest piece, and note its CUSIP and maturity date.
- Get the yield and the price per $100, and ask for the bid as well as the ask if you might sell before maturity.
- Work out the first year's OID so you know the tax bill that arrives with no cash attached.
- Decide which account holds it: a taxable account means yearly phantom income, an IRA does not.
- Check whether it comes from TIPS, which changes both the payoff and the tax math.
- Line up the maturity date with the date you need the money.
If you want to see how a STRIPS price grows toward face value, the compound interest calculator shows the same path when you enter the price, the yield and the years left; its compounding options differ slightly from the semiannual convention, so the results will be close rather than identical.
What are the risks of Treasury STRIPS?
STRIPS carry the same minimal credit risk as other Treasuries but the most price risk, plus phantom income taxes, inflation risk and thinner trading.
- Price risk. A 30-year STRIPS would lose about a quarter of its value on a 1-point rise in yields. Holding to maturity removes the risk, but only if nothing forces a sale for decades.
- Phantom income. In a taxable account you pay tax every year on interest you will not receive until maturity, which is a real drain on cash flow.
- Inflation risk. A fixed sum decades away can buy much less than expected if inflation runs high, unless the piece comes from TIPS.
- Liquidity and pricing. Small and older pieces can trade at wide bid-ask spreads, so selling early can cost more than the quoted yield suggests.
- Access. STRIPS cannot be held in TreasuryDirect, so you need a bank or brokerage account, and each firm sets its own minimums and fees.
The payments are backed by the full faith and credit of the United States, so the risk is not in getting paid but in what happens before and between. Are Treasuries risk-free? explains that difference, and types of investment risk defines each risk on this list.