7. A portfolio manager at Superior Trust Company is structuring a fixed-income portfolio to meet the objectives of a client. The portfolio manager compares coupon U.S. Treasuries with zero-coupon stripped U.S. Treasuries and observes a significant yield advantage for the stripped bonds:

Term Coupon U.S. Treasuries Zero-Coupon Stripped U.S. Treasuries 3 years 5.50% 5.80%

7 6.75 7.25 10 7.25 7.60 30 7.75 8.20 Briefly discuss why zero-coupon stripped U.S. Treasuries could yield more than coupon U.S.

Treasuries with the same final maturity.