Treasury Will Use ‘Strips’ Plan on Bonds : Payments on Interest, Principal to be Split

The Treasury Department announced Tuesday that it is making it easier to separate the principal and the interest payments of government bonds so that each can be sold separately by private securities firms.

The program is being nicknamed “strips” and results from the success of private investment packages based on “zero-coupon” bonds, which make one payment when they mature, and also on the string of semiannual interest coupons.

The government will provide separate registration numbers for the bonds and the interest payments under certain conditions to allow more securities firms to create an even wider variety of investments with less bookkeeping cost.

Increased Demand

The goal, officials said, is to make possible an increased demand for the securities that translates into a lower interest rate than otherwise, in the process lowering the government’s cost of borrowing money.

The bond market rose following the announcement. “You have to assume that the market liked the idea of strips,” a spokesman for Salomon Bros. Inc., the largest originator of zero-coupon Treasury issues.

“I think that we see the potential for this whole program as very substantial,” Thomas J. Healey, assistant secretary for domestic finance, told reporters.

Life insurance companies may integrate zero-coupon bonds into new insurance products and financial institutions may create new investment packages specifically tailored to providing long-term savings for education expenses, he said.