Would a treasury strip portfolio be more or less risky than an equivalent Treasury Bond? By equivalent i mean it has the same cash flows and same maturity.
If u buy zero coupon strips vs t bonds @ par you’re trading reinvestment risk for interest rate risk. The “better choice” depends on the context of what you’re trying to achieve. If you have liability to fulfill in 10 years the safest thing u can do is buy the zero coupon bond at the present value of your future liability. However, from a mean-variance perspective it’s the worst of all your options, the best being rolling over 30 day t bills, but you introduce a tremendous amount of reinvestment risk. If one was superior to the other in all aspects the inferior option wouldn’t exist. They each have their benefits.
If you mean Treasury strips so that the strip portfolio has the same cash flows as the bonds, then the portfolios are completely the same. The govt hs worked hard to make sure there are no tax or other advantages in one over the other. There’s not even a liquidity difference as you can reconstitute the bonds from the strips.
If the cash flows are truly the same and the maturity is the same, then by the law of one price, the bond should be priced the same. If the strips are being synthesized by a private organization (like a bank), then you may have some credit risk on the strips that you don’t have in the T-bond, on the off chance that they’ve messed up something in the conversion process. It should be a pretty small risk premium, though, strips are kinda standard stuff. Does the strip include the principal payment at the end? You’ve said the cash flows are the same, so I assume it does, but my understanding is that strips are coupon-only. If the strip is only the value of the coupon and not the principal, then the strip will have more convexity than a T-bond at the same price. Convexity is a benefit to the bondholder because it basically reduces risk (if interest rates change either way, a bond with more convexity will be worth more than a bond with equal duration and less convexity).