What is a characteristic of corporate zero bonds compared to Treasury STRIPS?

Corporate zero bonds, or zero-coupon bonds issued by corporations, have a notable characteristic of generally carrying higher risks compared to Treasury STRIPS. The primary reason for this increased risk is the credit risk associated with corporate issuers, as corporations may face financial challenges that could lead to default. Conversely, Treasury STRIPS are backed by the full faith and credit of the U.S. government, making them inherently lower in risk.

When investing in corporate zero bonds, the investor is taking on the risk that the corporation may not be able to meet its obligations, which includes the payment of interest and principal at maturity. This inherent risk is a critical distinction between corporate zero bonds and Treasury STRIPS. As such, understanding the risk profiles of different types of zero-coupon bonds is essential for making informed investment decisions.