Why Falling STRIP Prices Do Not Determine Yield Curve Slope

Summary

The document explains why observing lower prices for zero-coupon STRIPS at longer maturities does not, by itself, reveal whether the yield curve slopes upward, downward, or is flat. A STRIP price is a discount factor: it reflects discounting a future payment back to the present. Discount factors can decline with maturity under different patterns of zero rates, so their downward movement alone does not identify the direction of the rate curve.

The answer supports this point with a small numerical illustration that pairs flat, rising, and falling zero-rate examples with discount factors that decrease across maturities. The key comparison is between the term structure of zero yields and the prices of the corresponding discount bonds. To infer curve slope, one needs the maturity-specific yields or enough price information to calculate them; the simple observation in the question is insufficient. The illustration is explanatory rather than empirical and does not address additional market effects such as credit risk or liquidity.

Key ideas

• A STRIP is a discount bond whose price reflects the present value of a future payment.
• Discount factors can decline with maturity under flat, rising, or falling zero rates.
• Falling STRIP prices alone do not establish the slope of the yield curve.
• Maturity-specific yields are needed to determine the curve’s direction.

Tags

# Relationship Between Yield Curve and STRIP Prices


# Relationship Between Yield Curve and STRIP Prices












Suppose at different maturities (e.g., 1 year from now, 2 years from now, 3 years from now, etc.), the price of a STRIP security is consistently decreasing as the maturity increases all else held constant.

Then, what kind of slope would the yield curve have?

## Answer by David Duarte (score 3, accepted)

https://quant.stackexchange.com/a/59034

This is a pretty basic finance question.

Strips are discount bonds so their price is basically a discount factor and the fact that the price is decreasing with maturity, on its own, is not enough information to determine the slope of the yield curve.

Here is a simple example of 3 yield curves (flat, upward sloping and downward sloping) that will all have decreasing discount factors (strip prices):

```
import matplotlib.pyplot as plt
import pandas as pd
import numpy as np

zeros = pd.DataFrame({
    'A': [0.5, 0.5, 0.5, 0.5],
    'B': [0.5, 0.6, 0.7, 0.8],
    'C': [0.5, 0.45, 0.4, 0.35]
}, index=range(1,5))

strips = zeros.apply(lambda x: np.exp(-x / 100 * zeros.index))
fig, ax = plt.subplots(1, 2, figsize=(8,4))
zeros.plot(marker='o', ax=ax[0], title="Zero Rates")
strips.plot(marker='o', ax=ax[1], title="Discount Factors");
```

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