SIE (Securities Industry Essentials) Practice Exam

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?

1. Municipal bonds

2. Zero-coupon bonds

3. STRIPS

4. Junk bonds

The correct answer is: STRIPS

The correct answer is STRIPS, which stands for Separate Trading of Registered Interest and Principal of Securities. STRIPS are a type of Treasury bond where the interest (coupon) payments and the principal repayment are separated from the bond itself. This allows investors to buy and sell the interest and principal components as individual securities. Investors often buy STRIPS to receive investment returns only at maturity without periodic interest payments, making them attractive for certain strategies, such as matching future liabilities. STRIPS maintain the same credit risk as other U.S. Treasury securities because they are backed by the full faith and credit of the U.S. government. The other types of securities mentioned do not fit this description. Municipal bonds are issued by local or state governments and provide tax advantages but do not have detached payments like STRIPS. Zero-coupon bonds do not pay interest during their life but are sold at a deep discount, with the return being the difference between the purchase price and face value at maturity; they do not involve separating coupon and principal payments. Junk bonds are high-yield bonds with a higher risk of default and are not related to government securities or the concept of separating payment components.