Question: 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

A manager at Madison Trust Company is structuring a fixed-income 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 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.

Coupon U.S. Treasuries 5.50% 6.00% 6.75% 725% 7.40% 775% Zero Coupon Stripped U.S. Treasuries 5.80% 6.60% 7.25% 7.60% 8.80% 775% Maturity 3 year 5 year 7 year 10 year 15 year 30 year

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