What is the function of Treasury STRIPS in investing?

Treasury STRIPS, which stands for Separate Trading of Registered Interest and Principal of Securities, serve a specific function in the realm of fixed-income investing: they eliminate reinvestment risk. When you invest in Treasury STRIPS, you are essentially purchasing the right to receive the future cash flows (interest and principal payments) from a U.S. Treasury bond, but in zero-coupon form. This means that the investor does not receive periodic interest payments but instead receives a single payment at maturity that is the face value of the bond, which is sold at a discount.

By investing in STRIPS, you lock in a specific yield and avoid the complications associated with needing to reinvest interest payments over time at potentially lower yields. This makes them particularly appealing for investors who wish to plan for specific future cash flow needs without the uncertainty of fluctuating interest rates affecting their reinvestment opportunities. Thus, the function of Treasury STRIPS to eliminate reinvestment risk is a crucial aspect of their design and appeal to some investors.