What TWO types of securities can be included in the STRIPS program to generate zero-coupon securities?

The STRIPS program, or Separate Trading of Registered Interest and Principal Securities, allows certain types of securities to be divided into their individual coupon payments and the principal amount. This process generates zero-coupon securities, which do not make periodic interest payments but are instead sold at a discount and mature at par value.

Treasury notes and Treasury bonds are the two types of securities included in the STRIPS program. When these securities are STRIPS-ified, their coupons are separated from the principal. Each coupon payment and the final principal payment can then be sold as separate zero-coupon securities, giving investors the ability to choose specific maturity dates and avoid taxable interest payments until maturity. This feature makes them particularly attractive for investors looking for predictable cash flows at a determined future date, without the periodic interest payments associated with traditional bonds.

Other options do not align with the criteria for STRIPS. Corporate bonds can sometimes have different regulations and are not commonly part of the STRIPS program, while municipal bonds and corporate stocks do not fit the requirements to be treated as zero-coupon securities in this context. Additionally, government bonds and commercial paper do not typically apply to the STRIPS mechanism.