T-Strips = Zero Risk Investment
A STRIP is the acronym or it stands for Separate Trading of Registered Interest and Principal Securities. Zero-coupon securities which have maturities longer than a period of one year are not available for issue by the US Treasury, so it has created a program called the STRIPS program, where the principal payments and interest payments or coupons of standard Treasury securities can be broken or disintegrated and traded separately as zero-coupon securities.
History of T-Strips
STRIPS was launched in 1985. The name STRIPS was derived before the computer age, when the paper bonds were physically traded and the traders would tear off the interest coupons literally from the paper securities and resale the broken parts separately.
Under this program, the financial entity can provide the Treasury with standard treasury note or treasury bond that can be stripped. Not naked! :-) ..but stripped into individual instruments of cash flow. At this point the securities are returned to the financial entity. The United Treasury also makes sure that all the parts of a T-Strip are tagged so that the reconstitution of them later can happen without the danger of synthetic bonds never issued by the Treasury.
For instance, a 10-year note which is issued will be stripped into twenty interest payments, two annually or semi-annually for ten and one principal payment which will be due at its maturity date. All the twenty interest payments plus the single principal payment are broken up into STRIPS form, each one will then become a separate security. The new separate securities are then identified as coupon strips for the interest payments and principal strips for the principal payment. Jointly they are called Treasury STRIPS.
These Treasury STRIPS are separate zero-coupon securities. Nothing is different about them at all from the zero-coupon securities. In fact, to an investor, there is not a difference between a coupon strip and principal strip, although technically the Treasury STRIPS are not identically the same. In this example, all twenty one coupons have a unique identifying number called the CUSIP number.
The STRIPS program mandates that all the disaggregated or "stripped" securities be kept in a book-entry system for easier tracking and transfer efficiency; this is the purpose of the said CUSIP number. Now, all the coupons can be traded and held individually.
Risk-Free Investing Using United States Treastury Strips
The Treasury STRIPS normally mature over ten years out to thirty years. They are backed by the US government which makes them risk-free credits. STRIPS are not issued or sold directly to investors, only financial institutions such as investment banks and brokerage firms; government securities brokers and dealers can hold and purchase it.
Treasury STRIPS allows liquidity in the marketplace because it gives investors several maturity options. Like other zero-coupon instruments STRIPS can be utilized to acheive a wide range of investment goals because they are definitely going to have cash-flow values at a known future date. They are attractive to investors with specific opinions in regards to interest rates, because prices of STRIPS are especially sensitive to fluctuations in interest rates.
STRIPS are more popular when short-term interest rates are low. At these times short term bank rates and reinvesting bond proceeds are not desirable. T- Strips, being zero-coupon securities, do not have reinvestment risk. - 23167
History of T-Strips
STRIPS was launched in 1985. The name STRIPS was derived before the computer age, when the paper bonds were physically traded and the traders would tear off the interest coupons literally from the paper securities and resale the broken parts separately.
Under this program, the financial entity can provide the Treasury with standard treasury note or treasury bond that can be stripped. Not naked! :-) ..but stripped into individual instruments of cash flow. At this point the securities are returned to the financial entity. The United Treasury also makes sure that all the parts of a T-Strip are tagged so that the reconstitution of them later can happen without the danger of synthetic bonds never issued by the Treasury.
For instance, a 10-year note which is issued will be stripped into twenty interest payments, two annually or semi-annually for ten and one principal payment which will be due at its maturity date. All the twenty interest payments plus the single principal payment are broken up into STRIPS form, each one will then become a separate security. The new separate securities are then identified as coupon strips for the interest payments and principal strips for the principal payment. Jointly they are called Treasury STRIPS.
These Treasury STRIPS are separate zero-coupon securities. Nothing is different about them at all from the zero-coupon securities. In fact, to an investor, there is not a difference between a coupon strip and principal strip, although technically the Treasury STRIPS are not identically the same. In this example, all twenty one coupons have a unique identifying number called the CUSIP number.
The STRIPS program mandates that all the disaggregated or "stripped" securities be kept in a book-entry system for easier tracking and transfer efficiency; this is the purpose of the said CUSIP number. Now, all the coupons can be traded and held individually.
Risk-Free Investing Using United States Treastury Strips
The Treasury STRIPS normally mature over ten years out to thirty years. They are backed by the US government which makes them risk-free credits. STRIPS are not issued or sold directly to investors, only financial institutions such as investment banks and brokerage firms; government securities brokers and dealers can hold and purchase it.
Treasury STRIPS allows liquidity in the marketplace because it gives investors several maturity options. Like other zero-coupon instruments STRIPS can be utilized to acheive a wide range of investment goals because they are definitely going to have cash-flow values at a known future date. They are attractive to investors with specific opinions in regards to interest rates, because prices of STRIPS are especially sensitive to fluctuations in interest rates.
STRIPS are more popular when short-term interest rates are low. At these times short term bank rates and reinvesting bond proceeds are not desirable. T- Strips, being zero-coupon securities, do not have reinvestment risk. - 23167
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posted by X - Men @ 9:40 AM
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