History of T-Strips
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.
Background Information Behind Treasury 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 the STRIP program, a financial institution can present the US Treasury with a standard Treasury note, Treasury Bond or TIPS (Treasury Inflation- protected Security) to be "stripped." The Treasury then breaks or disintegrates the individual flows of cash into separate securities, after which it is returned to the financial institution.
For example, a 10-year note which is freshly will be stripped into twenty interest payments, two for each year or semi-annually for ten and one principal payment payment due at maturity date. All the twenty interest payments plus the single principal payment are converted to 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. Together they are referred to as 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 the example given, all twenty one coupons have a unique identifying number called the CUSIP number.
The STRIPS program requires that the "stripped" treasury securities are maintained in a book entry form with the fed wire. This enables the "strips" to be easily tracked, therefore making individual trading of the security possible.
T Strips Are Risk Free
It is important to know that STRIPS are not issued or sold directly to investors. In order to but U.S Treasury STRIPS, you need to use officially licensed financial institutions and U.S. government securities brokers and dealers. There are options in how the maturity of the STRIPS occur over the period of the investment. It can be from ten to thirty years. STRIPS are highly popular with investors who want to be sure they receive a known payment amount on a specific future date, because it is a very safe investment.
Treasury STRIPS allows liquidity in the investing world because it provides investors with many maturity options. Like other zero-coupon instruments STRIPS can be used 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 regarding interest rates, because prices of STRIPS are particularly sensitive to changes in interest rates.
Treasury STRIPS are much more popular in times like today when the short-term interest rates are at their lowest. Investors don't want to invest so much in short term bank rates and reinvesting bond proceeds are also out of favor. It is during times of like this, when the rock solid foundation of T-Strips combined with the full backing of the U.S. government that investors flock to the solid investments provided by zero-coupon securities in the form of T-strips. - 23226
Background Information Behind Treasury 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 the STRIP program, a financial institution can present the US Treasury with a standard Treasury note, Treasury Bond or TIPS (Treasury Inflation- protected Security) to be "stripped." The Treasury then breaks or disintegrates the individual flows of cash into separate securities, after which it is returned to the financial institution.
For example, a 10-year note which is freshly will be stripped into twenty interest payments, two for each year or semi-annually for ten and one principal payment payment due at maturity date. All the twenty interest payments plus the single principal payment are converted to 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. Together they are referred to as 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 the example given, all twenty one coupons have a unique identifying number called the CUSIP number.
The STRIPS program requires that the "stripped" treasury securities are maintained in a book entry form with the fed wire. This enables the "strips" to be easily tracked, therefore making individual trading of the security possible.
T Strips Are Risk Free
It is important to know that STRIPS are not issued or sold directly to investors. In order to but U.S Treasury STRIPS, you need to use officially licensed financial institutions and U.S. government securities brokers and dealers. There are options in how the maturity of the STRIPS occur over the period of the investment. It can be from ten to thirty years. STRIPS are highly popular with investors who want to be sure they receive a known payment amount on a specific future date, because it is a very safe investment.
Treasury STRIPS allows liquidity in the investing world because it provides investors with many maturity options. Like other zero-coupon instruments STRIPS can be used 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 regarding interest rates, because prices of STRIPS are particularly sensitive to changes in interest rates.
Treasury STRIPS are much more popular in times like today when the short-term interest rates are at their lowest. Investors don't want to invest so much in short term bank rates and reinvesting bond proceeds are also out of favor. It is during times of like this, when the rock solid foundation of T-Strips combined with the full backing of the U.S. government that investors flock to the solid investments provided by zero-coupon securities in the form of T-strips. - 23226
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posted by X - Men @ 12:57 AM
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