What type of bond issued by the U.S. Treasury allows avoidance of reinvestment risk?

The correct choice is Treasury STRIPS because they are created from U.S. Treasury securities and allow for the avoidance of reinvestment risk. STRIPS stands for Separate Trading of Registered Interest and Principal Securities. These securities are sold at a discount and do not make periodic interest payments. Instead, they are redeemed at face value upon maturity. Because they do not provide interim cash flows, investors are not faced with the risk of having to reinvest interest payments at potentially lower interest rates; this characteristic helps to eliminate reinvestment risk.

In contrast, T-bonds and T-notes provide regular interest payments, which can carry reinvestment risk if interest rates fall and result in lower yields on reinvested funds. Convertible bonds also involve potential reinvestment risks since they offer interest payments and the possibility of converting to equity. Therefore, Treasury STRIPS are the unique option among the choices provided that specifically addresses the issue of reinvestment risk.