Question: A portfolio manager at Superior Trust Company is structuring a fixed-income portfolio to meet the objectives of a client. The portfolio manager compares coupon U.S.

A manager at Superior Trust Company is structuring a fixed-income to meet the objectives of a client. 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 why zero-coupon stripped U.S. Treasuries could yield more than coupon U.S. Treasuries with the same finalmaturity.

Zero-Coupon Stripped U.S. Treasuries Coupon U.S. Treasuries 5.50% 6.75 7.25 7.75 Term 3 years 5.80% 7.25 10 7.60 30 8.20

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