Treasuries, STRIPS & TIPS
The US Government as an issuer
- The US Government is the largest and most active issuer of securities in the world.
- With debt levels currently more than $39 trillion, the US Government securities market is massive. Investors around the world fund the activities of our federal government.
Where federal spending goes
Top recipients of federal spending:
- Social Security
- Medicare/Medicaid (health-related spending)
- Defense (military, National Guard, etc.)
The federal government also spends large amounts on veterans’ benefits, education, housing assistance, and transportation-related costs.
How the government funds itself
| Concept | Definition | Detail from the text |
|---|---|---|
| Deficit spending | Borrowing more money than it brings in | The government’s funding method since 2001, the last time there was a federal surplus |
| Income + payroll taxes | Largest revenue source | ~84.1% of federal revenues in FY2025 (individual income taxes ~50.5% + payroll taxes ~33.6%) |
| Other revenue | Remaining sources | Excise taxes, estate taxes, gift taxes, and taxes on imports and exports (tariffs) |
Who does what: Treasury, Mint, BEP, and the Fed
| Body | Responsibility |
|---|---|
| US Department of Treasury | Manages the finances of the US Government; collects taxes through the IRS and issues securities to fund federal projects and expenditures |
| US Mint | Creates coins |
| Treasury’s Bureau of Engraving and Printing (BEP) | Creates paper bills |
| Federal Reserve | Creates digital currency and distributes all forms of currency (coins, bills, and digital) |
Easy to confuse: the Mint makes coins, the BEP prints paper money, and the Fed creates digital currency and distributes everything.
Minimum denomination
While many bonds have a minimum investment of $1,000, Treasuries have a minimum denomination of $100. This is a common feature across all Treasury products.
Bills, Notes, and Bonds — comparison
| Feature | Treasury bills (T-bills) | Treasury notes (T-notes) | Treasury bonds (T-bonds) |
|---|---|---|---|
| Term | Short-term | Intermediate-term | Long-term |
| Maturity | 4, 6, 8, 13, 17, 26, 52 weeks | 2–10 years from issuance (2, 3, 5, 7, 10-year intervals) | Up to 30 years from issuance (20 and 30-year intervals) |
| Coupon | Zero coupon | Interest-paying | Interest-paying |
| Interest payments | None — interest earned via discount to par | Semi-annual | Semi-annual |
| Issued/sold at | A slight discount | Par | Par |
| Auction frequency | As often as weekly | Typically monthly | Typically quarterly |
| Minimum denomination | $100 | $100 | $100 |
T-bills are the most commonly sold Treasury security, in part because they can be auctioned as often as weekly (many other Treasury products are auctioned on monthly or quarterly cycles).
The note/bond maturity intervals (2/3/5/7/10-year and 20/30-year) are described by the text as “lightly tested.”
T-bill discount mechanics — worked example
Because of their short-term nature, Treasury bills do not pay semi-annual interest like most other bonds. Instead, the investor earns interest through the difference between the purchase price and the par value received at maturity.
For example, an investor purchases a one-year Treasury bill for $970. One year later, the US Government pays $1,000 (par), so the investor earns $30 in interest.
Sidenote: CMBs (Cash management bills)
| Feature | Cash management bills (CMBs) |
|---|---|
| Similar to | Treasury bills |
| Coupon | Zero coupon |
| Issued at / matures at | Issued at a discount, mature at par |
| Purpose | Close short-term funding gaps when spending rises unexpectedly |
| Issuance schedule | “As needed” basis — issuance is not formally scheduled |
| Maturity | Varies with need; can be as short as one day |
Because CMBs are only issued in times of need, they often aren’t a major topic in discussions of US government securities. Still, you could see them mentioned on the exam.
STRIPS and Treasury Receipts
| Term | Definition | Example / detail |
|---|---|---|
| STRIPS | Long-term, zero coupon bonds created from Treasury securities; issued at deep discounts and mature at par several years later | Acronym: Separate Trading of Registered Interest and Principal of Securities (you don’t need to know the acronym for the exam) |
| Treasury Receipts | Long-term, zero coupon bonds created by financial institutions (banks, investment firms) | Institutions buy sets of T-notes and T-bonds, place them into a portfolio, strip them of their coupons, and re-sell them as zero coupon bonds |
| Phantom tax | Annual taxation on accrued interest even though no interest is received until maturity | 20-year STRIPS bought at $600 → tax bill on $20 of interest annually |
STRIPS vs Treasury Receipts
| Feature | STRIPS | Treasury Receipts |
|---|---|---|
| Created/issued by | Securities dealers (not technically issued directly by the US Government) | Financial institutions (banks, investment firms) |
| Oversight | Federal Reserve oversees their creation | Created without government oversight (in particular, Federal Reserve oversight) |
| Backing | Fully backed by the US Government — same backing as T-bills, notes, bonds | Not backed by the US Government (the underlying T-notes/T-bonds are fully backed, but the new product created from them is not) |
| Relative safety | Slightly safer | Slightly riskier |
| Yields | Tend to trade with lower yields | Tend to trade with higher yields |
| Structure | Long-term, zero coupon | Long-term, zero coupon |
🔑 The main point to remember: STRIPS are fully backed by the US Government, while Treasury Receipts are not.
Suitability and taxation of STRIPS / Treasury Receipts
- Not suitable for investors seeking current income. With traditional coupon bonds, an investor receives semi-annual interest payments. With STRIPS, there are no periodic interest payments — interest is effectively paid at maturity (which could be up to 30 years later).
- Taxation: Both STRIPS and Treasury Receipts are subject to annual taxation, even though investors won’t receive interest until maturity. This is sometimes referred to as “phantom tax.” The IRS prefers to collect taxes as the interest accrues rather than waiting until maturity.
If you purchase 20-year STRIPS at $600, you’ll receive a tax bill for $20 of interest annually ($400 discount / 20 years = $20 annualized interest).
STRIPS worked example
Assume you find 20-year STRIPS selling for $600. You purchase the STRIPS today for $600, hold the investment for 20 years, then receive $1,000 at maturity. Your return over 20 years would be $400, or the equivalent of $20 a year in interest.
Price volatility
We first discussed price volatility in the fixed income basics chapter. The market prices of bonds with long maturities and low coupons move the most when interest rates change.
STRIPS and Treasury Receipts tend to have very volatile market price movements because they have both characteristics:
- Long-term maturities (up to 30 years)
- Low coupons (0%)
Even though STRIPS and Treasury Receipts have a 0% interest rate, they are very subject to interest rate risk. A bond does not need to pay ongoing interest to be exposed to interest rate risk.
TIPS (Treasury Inflation Protected Securities)
Why inflation is a problem for bondholders
In the Common stock suitability chapter, we learned how these securities hedge against the risks of inflation. While common stock tends to protect investors from purchasing power risk, fixed income securities (preferred stock and bonds) are particularly susceptible to inflation.
Think about it this way: if you own a $1,000 par, 5% bond, it pays $50 a year in interest. While $50 can buy a fair amount today, it might not buy much in 20 years if inflation is high.
Now scale that up. Assume a retired investor buys a large number of bonds and currently receives $50,000 in annual interest. They need this amount of money in 2026 to pay for living expenses. At an annual inflation rate of 3%, 20 years later they’ll require roughly $90,000 of annual income to keep pace with inflation. If the investor bought 20-year fixed-interest-rate bonds, those bonds still pay the same $50,000 of fixed interest annually.
To keep pace with inflation, investors can keep a portion of their portfolio invested in the stock market, which tends to outpace inflation over long periods of time. If the stock market is too risky for the investor, they can consider investing in TIPS.
TIPS structure
| Feature | Detail |
|---|---|
| Issuer | US Government |
| Term | Long-term debt securities |
| Interest payments | Semi-annual |
| Coupon | Fixed — never changes |
| Principal (par) | Adjusts every six months based on CPI levels |
| Maturities issued | 5, 10, and 30-year |
| Payout at maturity | The greater of the original par value (typically $1,000) or the adjusted par value |
| Purpose | Designed to make higher payments when inflation rises |
The coupon stays fixed; the principal moves with CPI. Because the interest payment is calculated on the adjusted principal, rising CPI produces higher interest payments.
| Term | Definition | Example |
|---|---|---|
| CPI (Consumer Price Index) | The government’s measure of inflation, calculated by the U.S. Bureau of Labor Statistics; each month CPI tracks price changes of goods and services across the United States | A +2% CPI move over six months raises a $1,000 par to $1,020 |
| Deflation | Prices falling instead of rising | A -4% annual CPI causes a -2% six-month par adjustment |
TIPS at issuance
30-year TIPS issued
$1,000 par 3% fixed coupon Semi-annual interest payments = $15
TIPS are typically issued at par with a fixed coupon. In this example, the 30-year TIPS have a 3% coupon, which is always fixed (it doesn’t change). At issuance, these securities are set to pay $15 twice a year ($30 in annual interest).
TIPS with rising inflation (+2% CPI over six months)
30 year TIPS adjustment (+2% CPI)
$1,020 adjusted par value 3% fixed coupon Semi-annual interest payment = $15.30
Because inflation increased, the bond makes a higher semi-annual interest payment. The coupon (3%) stays fixed, but the principal value increases. With inflation rising by 2%, the par value rises by 2% as well (2% of $1,000 = $20). Now the bond pays 3% of $1,020, which is $30.60 annually. The semi-annual payment is half of that: $15.30.
TIPS practice question (rising inflation)
An investor purchases 10-year, $1,000 par TIPS with a 5% coupon. After one year of owning the security, CPI is reported at 4%. What is the investor’s interest payment at the one year mark?
A) $24.00 B) $25.51 C) $26.01 D) $51.02
Answer = C) $26.01
TIPS are adjusted every six months. An annual CPI increase of 4% means inflation is increasing by 2% every six months — you must compound two adjustments, not apply 4% once.
$1,000 par x 1.02* = $1,020 (first adjustment @ six month mark) $1,020 par x 1.02* = $1,040.40 (second adjustment @ one year mark)
*An easy way to calculate a percentage change to a number is by adding the percent in decimal form (2% = 0.02) to the number 1 (1 + 0.02 = 1.02). Then, multiply this by the original value to get the adjustment.
After one year, the par value is adjusted to $1,040.40. Now, we must find 5% of this adjusted par value:
$1,040.40 x 0.05 = $52.02
Last, we must divide this annual dividend amount by two given these payments are made semi-annually:
$52.02 /2 = $26.01
Therefore, this bond will pay $26.01 in interest at the one year mark.
Deflation and TIPS
While inflation is more common, deflation can and does occur. Instead of prices rising, deflation results in lower prices. That may sound appealing at first, but it can be harmful to the economy:
- During deflationary periods, prices may fall, but wages and other forms of income often fall too.
- Deflation can cause consumers and businesses to delay spending, which reduces economic output.
- Example: if car prices are falling, many buyers will wait — leading to unsold inventory and lower business activity.
Deflation practice question. Using the same 30-year TIPS ($1,000 par, 3% fixed coupon, $15 semi-annual payments), what is the adjustment to par and the next interest payment if CPI reports a 4% annual fall in prices?
Adjusted par value = $980 Next interest payment = $14.70
With an annual falling CPI rate of 4%, the par value adjusts after 6 months at a rate of -2% (half of the annual 4% decline). 2% of $1,000 is $20, so the par value will fall to $980.
Now, calculate the fixed coupon (3%) based on the adjusted par value ($980). This results in a new annual rate of $29.40, leading to semi-annual interest payments of $14.70 ($29.40 / 2).
The rule regarding adjusted principal at maturity is especially useful in deflationary environments. Even if the adjusted principal falls below the original par ($1,000), the investor still receives the greater of the original par value or the adjusted principal at maturity.
Sidenote: Callable Treasuries
- Starting in 1985, the US Treasury no longer issued callable securities.
- Before then, some 30-year Treasury bonds used to be callable. All of those bonds have since been redeemed.
- 🔑 It’s safe to assume all US Treasury securities today are non-callable.
Key points
US Government
- Largest and most active securities issuer in the world
- Primarily funds activities through deficit spending
US Government debt denominations
- Minimum of $100
Treasury bills
- Short-term zero coupon debt
- Issued at discounts and mature at par
- Available maturities:
- One month (4 weeks)
- One and a half months (6 weeks)
- Two months (8 weeks)
- Three months (13 weeks)
- Four months (17 weeks)
- Six months (26 weeks)
- One year (52 weeks)
Cash management bills (CMBs)
- Short-term, zero coupon treasury securities
- Issued to close short-term funding gaps
- Maturities as short as one day
Treasury notes
- 2-10 year maturities
- Pay interest semi-annually
Treasury bonds
- Up to 30-year maturities
- Pay interest semi-annually
STRIPS
- Issued by US Government
- Long-term zero coupon bonds
Treasury Receipts
- Issued by financial institutions
- Long-term zero coupon bonds
STRIPS and Treasury Receipts
- Not suitable for investors seeking income
- Subject to phantom taxes
- High price volatility
- Very susceptible to interest rate risk
Treasury Inflation Protected Securities (TIPS)
- Inflation-adjusting debt securities
- Principal (par) value adjusts to CPI
- Coupon stays fixed
- Issued in 5, 10, and 30-year maturities
- Investor receives greater of original par or adjusted par at maturity
Sources
Primary/official references for the material in this chapter. Every link was fetched and returned HTTP 200 on 2026-08-15.
| # | Source | Publisher |
|---|---|---|
| 1 | T-bills — discount pricing, ≤52-week maturities | TreasuryDirect |
| 2 | T-notes — 2 to 10 years, semiannual interest | TreasuryDirect |
| 3 | T-bonds — 20 and 30 years | TreasuryDirect |
| 4 | TIPS — principal adjusts with CPI | TreasuryDirect |
| 5 | STRIPS — separated principal and interest, zero coupon | TreasuryDirect |
| 6 | Achievable Series 65 — chapter 1.2.6 | Achievable (course text) |