Why does the trade that pins a coupon bond to its STRIPS need short selling, and what broke when the SEC banned it?
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The trade when exceeds the STRIPS cost
Recap in one line, then write the trade for an overpriced coupon bond and show it needs no money down, carries no risk and leaves no obligations.
Frictions: transaction costs and the short sale
State that the pricing equality holds only up to transaction costs, and define a short sale step by step: borrow the security, sell it, keep the proceeds, return it to the lender.
The September 2008 short-sale ban and its alternative
Record the SEC ban's scope (financial-company shares, not Treasuries) and its effect on arbitrage pricing, then set out the alternative of raising borrowing costs, as with hard-to-borrow stocks.
Partial correction by holders of the expensive bond
Work the 110-versus-100 example of a holder selling the coupon bond and buying STRIPS, list the two conditions it needs, and note that pension-fund holders only narrow the gap rather than close it.