History of T-Strips
T-Strip are a great investment tool if you know what they are. The term STRIP is an acronym which stands for "Separate Trading of Registered Interest and Principal Securities." T Strips are U.S. Treasury securities that are issues by the Treasury for zero-coupon securities which have a maturity period over one year. The STRIPS program gives investors much more flexiblity in how they trade for the securities.
How It All Began
People call then T-STRIPS due to the fact that they are issued by the Treasury. The background behind the start of T-Bill trading took a path closely related to the dawn of the computer age. In the era of break dancing, rubics cube, and parachute pants, there was a new method of investing that was being born on the technological backbone of new computer software and hardware. T-Strip trading was much different than the old style coupon tearing of the old style zero coupon bonds. The US Treasury made the new form official by passing out identifications for the new STRIPS called a CUSIP code.
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 example, a 10-year note which is issued will be stripped into 20 interest payments, two for each year or semi-annually for 10 years and one principal payment which will be due at its maturity date. All twenty interest payments plus the single principal payment are converted to STRIPS, each of them 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. As a matter of fact, to an investor, there is not a difference between a coupon strip and principal strip, although in reality the Treasury STRIPS are not identical. In the example given, 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.
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 marketplace because it provides investors with many maturity tochose from. Like other zero-coupon instruments STRIPS can be used to acheive a wide range of objectives because they are known to have cash-flow values at a known future date. They are appealing to investors with their own opinions regarding interest rates, because prices of STRIPS are especially sensitive to changes in interest rates.
Treasury STRIPS are much more popular in economic times like today when the short-term interest rates are at their lowest. Investors don't intend 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. - 23217
How It All Began
People call then T-STRIPS due to the fact that they are issued by the Treasury. The background behind the start of T-Bill trading took a path closely related to the dawn of the computer age. In the era of break dancing, rubics cube, and parachute pants, there was a new method of investing that was being born on the technological backbone of new computer software and hardware. T-Strip trading was much different than the old style coupon tearing of the old style zero coupon bonds. The US Treasury made the new form official by passing out identifications for the new STRIPS called a CUSIP code.
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 example, a 10-year note which is issued will be stripped into 20 interest payments, two for each year or semi-annually for 10 years and one principal payment which will be due at its maturity date. All twenty interest payments plus the single principal payment are converted to STRIPS, each of them 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. As a matter of fact, to an investor, there is not a difference between a coupon strip and principal strip, although in reality the Treasury STRIPS are not identical. In the example given, 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.
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 marketplace because it provides investors with many maturity tochose from. Like other zero-coupon instruments STRIPS can be used to acheive a wide range of objectives because they are known to have cash-flow values at a known future date. They are appealing to investors with their own opinions regarding interest rates, because prices of STRIPS are especially sensitive to changes in interest rates.
Treasury STRIPS are much more popular in economic times like today when the short-term interest rates are at their lowest. Investors don't intend 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. - 23217
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posted by X - Men @ 2:53 AM
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