Yield differences between coupon and principal STRIPS
Abstract
Purpose
Coupon and principal Separate Trading of Registered Interest and Principal Securities (STRIPS) maturing at the same date often trade at different yields. The paper aims to discuss this issue.
Design/methodology/approach
This paper analyzes for the first time the maturity structure of these differences for the US Treasury STRIPS market.
Findings
The paper surprisingly finds that short-term coupon STRIPS persistently trade at lower yields whereas long-term coupon STRIPS trade at higher yields compared to matched-maturity principal STRIPS.
Originality/value
An integrated analysis of Treasury STRIPS and the underlying notes market allows us to isolate two determinants: first, properties of the underlying notes that spill over to principal STRIPS, and second, the liquidity of coupon STRIPS measured by stripping activity and stripping volume.
Keywords
Acknowledgements
JEL classification – E43, G01, G12
Citation
Vonhoff, V. (2014), "Yield differences between coupon and principal STRIPS", Managerial Finance, Vol. 40 No. 4, pp. 326-354. https://doi.org/10.1108/MF-08-2013-0217
Publisher
:Emerald Group Publishing Limited
Copyright © 2014, Emerald Group Publishing Limited