I’m reading that STRIPS do not have reinvestment risk, either the coupon nor principal parts. I do not understand how STRIPS work. I thought that they take apart the coupon payments and the principal and sell off to investors. If that is the case, then wouldn’t the coupon STRIPS have reinvestment risk, because they are being paid out and would have to be reinvested?
Reinvestment risk is basically when you are forced to invest the proceeds/coupon from a security at a lower rate. STRIPS are zero coupon securities, so they can’t have reinvestment risk. There’s only one payment to the investor, and that is at maturity.
okay, thanks. so no matter what type of STRIP, it will always be a one payment security. i thought that the coupon STRIPS made payments, but I was wrong.
i thought “strips” only refers to the principal payment. the yield is usually the discount rate. coupon strips are considerred to be a series of cashflow/income. coupon strips are sold at the PV all cash payments. there is only going to be a yield to be calculated when there is an arbitrage oppurtnity when the price of all cash payments is higher than their PV.
Izen5: I am not sure what you are saying. Ruby: You’re absolutely correct
b/c the US Treasury does not offer zero-coupon T-Securities. The private sector purchase Treasury Notes and strips them to FORM Zero Coupon Treasury-Securities. They act/sell/value like a regular zero-coupon security, just without the hypothetical default risk. Hence, having no re-investment risk!