Starting Feb. 15, the Treasury will make it easier to sell its securities as zero coupon bonds. The move is aimed at fostering competition for the bonds and thereby reducing the cost of financing the public debt.
Assistant Secretary for Domestic Policy Thomas J. Healey yesterday outlined the program, announced last August by Secretary Donald T. Regan. Known by the acronym Strips (for Separate Trading of Registered Interest and Principal of Securities), it makes possible for the first time the trading of book-entry government bonds as direct obligations of the United States, not securities firms.
Zero coupon, or stripped, bonds are bearer Treasury securities whose coupons have been removed by a broker who then sells the parts separately for more than the price of the whole. The term also applies to book-entry securities, or those recorded in a computer for which no certificate is issued to the owner.
Since Wall Street invented the zero coupon several years ago, the investment has become a popular one for Individual Retirement Accounts, trusts for financing children's education, and other such investments for which the bondholder wants to ensure a certain return. Because zeros are bought at a deep discount and no interest is paid, the holder does not have to worry about reinvesting dividends at a comparable rate. They are also popular with speculators because zeros are more volatile than interest-paying bonds.
The Treasury will not issue zeros itself but will facilitate their sale through banks and securities firms by assigning separate identification numbers to the principal and interest components of the bonds. The interest components will be sold in $1,000 denominations in the secondary market. At first, only bonds of 10-year maturity or longer will be selected for Strips. The first issues will be the 10- and 30-year securities issued Feb. 15.
The Treasury estimates that some $45 billion in stripped bonds has been sold since mid-1982. The Treasury originally was opposed to stripping its securities, but a change in the law that required holders to pay taxes annually as if they were receiving interest eliminated Regan's objections.