Question

Describe, in at least 250 words, how an investor can use Treasury STRIPs to reduce/minimize/eliminate interest rate risk. Include a description of Treasury STRIPs.

Answer 1

Investor can use treasury STRIPS to minimise his risk as United States treasury STRIPS is a bond that will be chopped into number of interest payment and single principal amount so each of which is then separately sold to the investors and these will be sold at a discount to their face value and investors will be paying discount amount and they will be receiving full face value at the maturity. There will not be any kind of interest payment received by these Bond holders and the coupons are sold as separate investment so this will be used for investors who have a popular choice for the fixed income securities and these have highly extreme credit quality because they will be backed by the United States treasury securities and these will be loved by the risk-averse investors.

These strips are sold at a discount so invested does not require a large strash of cash to purchase them so they will be hold to the maturity and the investors will be knowing how much the precisely they will be receiving, so it will also offer a range of maturity date and they will be best of the dates of the interest payments with the investor wishes to sell the bond prior to the maturity the market has enough liquidity also to accommodate this transaction and due to its lower taxability and along with it there is a higher security this is a popular choice among investors as it will also used as bet against any kind of economic downturn and high portfolio diversification strategy.