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The government in the U.S. issues zero-coupon bonds up to one year maturity, but STRIPS are manufactured zero-coupon bonds with maturities up to 30 years.
The government in the U.S. issues zero-coupon bonds up to one year maturity, but STRIPS are "manufactured" zero-coupon bonds with maturities up to 30 years. So, for example, a financial institution could first buy 400 30-year coupon bonds issued by the government that each pay $2.50 of coupon every six months. The institution could then sell the combined coupons totaling $1,000 as a separate zero-coupon bond for each maturity ranging from 6 months up to 30 years. This is a financial innovation that occurred decades ago in the face of volatile inflation and an increased demand for long-term zero coupon government bonds. Given this information, analyze the following statement. "The yield to maturity (YTM) of a long-term STRIP will typically be higher than that of a short-term STRIP."
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