3. (14 points; 7 each) a. In the early 1980s, investment banks found they could buy Treasury securities, place them in a trust, and then sell multiple classes of securities to fund the trust where each class (strip) was a claim on one individual coupon payment or the final principal (only) from the underlying Treasury note or bond. Although they were doing nothing more than reselling the payments provided to them by the Treasury, the investment bankers found this practice to be profitable because investors were willing to pay more in aggregate for income in the form of strips than the cost of funding the strips by buying the underlying treasuries. Why did investors find these strips to be so attractive that they were willing to pay that much for them?

b. In 1985 the U.S. Treasury began selling strips itself. (More precisely Treasury designated certain bonds and notes as strippable which allowed the purchaser to resell individual coupon or interest payments.) What effect did this have on the production of strips by investment bankers? Why did it have this effect?