Relationship Between Yield Curve and STRIP Prices

Question

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 1

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");