SIE (Securities Industry Essentials) Practice Exam

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Which of the following securities is a form of T-bond where the coupon and principal payments are detached from the bond itself and sold separately?

Municipal bonds
Zero-coupon bonds
STRIPS
Junk bonds

The correct answer is: STRIPS

STRIPS, or Separate Trading of Registered Interest and Principal Securities, are a type of T-bond where the coupon and principal payments have been "stripped" or separated from the bond itself and sold as individual securities. This allows investors to purchase the specific cash flows (interest payments and principal repayment) of the bond as separate securities. Municipal bonds (A) are bonds issued by state or local governments, and they do not have the same characteristics as T-bonds. Zero-coupon bonds (B) are bonds that do not make any coupon payments, they are sold at a discounted price and investors receive the full face value at maturity. Junk bonds (D) are high-risk, high-yield bonds issued by companies with lower credit ratings. None of these options describe the features of STRIPS. Therefore, the correct answer is C.