In the 1980s, large amounts of coupon-bearing U.S. Treasury securities were stripped. The process of stripping involves selling the individual coupons and the par values separately as zero-coupon bonds. These so-called STRIPS appeal to investors who want to lock in a terminal value without incurring the risk associated with reinvesting intervening cash flows. Because the prices of STRIPS are highly sensitive to interest rate changes, STRIPS also appeal to investors who feel they can benefit from forecasting changes in interest rates.
Many factors affect the value of STRIPS. These include the shape of the term structure of interest rates, tax rules and rates, bond maturities, and the relative demand for zero-coupon bonds.
A bond that has been stripped can be put back together, or rebundled. Arbitragers continually monitor the prices of STRIPS and underlying coupon-bearing bonds, looking for profitable opportunities to strip or rebundle. Because of their actions, the prices of STRIPS and their underlying bonds will tend to converge.