Discussion Groups / English Usage / May 2009

You have that, erm, backwards.  Sort of.  Treasury bonds are issued in
$1000-face-value units (only).  Notes and bills can and normally do
have other denominations, in some cases in the hundreds of thousands
or millions.  Confusingly, the prices of bonds, including T-bonds, are
quoted in percentage of face value, which makes sense for large
investors (who can thus easily compare the discount/premium for bonds
of varying face values).

Treasury bonds can also be "stripped" (which the Treasury will tell
you is an acronym for "separate trading in interest and principal
securities" although this is almost certainly contrived) by separating
the "coupon" from the "principal".  This terminology derives from
historical usage when a bond was a physical sheet of paper,
representing a debtor's obligation, various bits of which ("coupons")
needed to be torn off and presented to the debtor to collect the
interest owed.  Bond traders still talk about the "coupon rate" of a
bond, which is the amount of interest the bondholder receives
expressed as a percentage of the face value.  Once a bond has been
stripped, the various parts are reassembled, along with identical
parts of other bonds from the same issue, into "zeros" (short for
"zero-coupon bonds") which, because they do not pay periodic interest
payments -- just a lump sum at maturity -- are sold at a discount.
The Treasury requires that these be created in increments of $1000, so
if you want to strip, say, a 4.25% thirty-year bond, you need 2,000
complete bonds, and you get back 2,000 principal zeros (face value
$1000 each) and 850 interest zeros (face value $1000) for each
remaining interest payment date.  The process is reversible, too.

(The advantage to zeros is that they can be bought at a discount.  The
disadvantange is that the U.S. government taxes the discount, even
though the holder doesn't receive any income from it until the bond
either matures or is sold.)

-GAWollman