A portfolio manager at Madison Trust Company is structuring a fixed-income portfolio to meet the objectives of a client. This client plans on retiring in 15 years and wants a substantial lump sum at that time. The client has specified the use of AAA-rated securities.
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.

Briefly discuss two reasons why zero coupon stripped U.S. Treasuries could yield more than coupon U.S. Treasuries with the same finalmaturity.

  • CreatedDecember 17, 2014
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