When a Treasury fixed-principal note or bond or a Treasury inflation-protected security TIPS is stripped through the commercial book-entry system each interest payment and the principal payment becomes a separate zero-coupon security. Each component has its own identifying number and can be held or traded separately. For example, a Treasury note with 10 years remaining to maturity consists of a single principal payment, due at maturity, and 20 interest payments, one every six months over a 10 year duration. When this note is converted to STRIPS form, each of the 20 interest payments and the principal payment becomes a separate security.
A strip bond is created from existing conventional bonds by separating each of the coupon payments as well as the principal payment the residual , from one another. Once stripped, each coupon and the residual can trade as a separate security, allowing the holder to receive a single known payment on a specific date also known as a "zero coupon" bond. The Fund is managed based on the philosophy that it is both impractical and financially prohibitive to fully replicate an index in pursuit of market returns. The Fund uses stratified sampling to efficiently achieve index-like returns.
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