Treasury strips, Financial Management

A treasury strip can be sold in two parts based on its components. When the investor is empowered with a right to receive the coupon payments on sale of its treasury securities, such component is called a treasury coupon strip; and when the investor is empowered with a right to receive the principal component of the security on its maturity date, such component is called a treasury principal strip. In simple words, the treasury coupon strips are those created out of coupon payments and the treasury principal strips are those created out of the principal amount.

Treasury coupon stripping is the act of detaching the interest payment coupons from the treasury securities and treating the coupons and the treasury securities as two separate securities. Each coupon entitles its owner to receive an amount as prescribed on a specified date. Similarly, the treasury security entitles its owner to call for repayment of its principal amount on its maturity date. These stripped securities offer investors abundant supply, no default risk, and a less risk of being 'called' or 'paid off', before the date of its maturity.

On stripping, the stripped treasury securities and their coupons are known as 'Zero Coupons' or 'Zeros.' Like zero coupon bonds, treasury strips also do not make any interest payments till maturity. The stripped treasury securities and the coupons are sold at a deep discount from their face values. The difference between the purchase price and the maturity vale of the stripped treasury securities is the yield on such securities. The yield on these stripped treasury securities is called as 'treasury spot rate'.

Zero-coupon securities have no reinvestment risk. This facilitates treasury strips of different maturities to provide a superior relationship between yield and maturity than that of securities on the on-the-run treasury yield curve. The absence of reinvestment risk in these stripped securities eliminates the bias arising from the variations in reinvestment risk of the compared securities. Further, the duration of these securities is more or less equal to its maturity. This provides a facility to compare bond issues against treasury strips on the basis of their duration.

Posted Date: 9/8/2012 6:49:49 AM | Location : United States







Related Discussions:- Treasury strips, Assignment Help, Ask Question on Treasury strips, Get Answer, Expert's Help, Treasury strips Discussions

Write discussion on Treasury strips
Your posts are moderated
Related Questions
Q. Cost of Equity Share Capital? Cost of Equity Share Capital: - The cost of equity is the utmost rate of return that the company should earn on equity financed position of its

Q. What is Purchasing Power Risk? Variations in the returns are caused also by the loss of purchasing power of currency. Inflation is the reason behind the loss of purchasing p

Q. Types of financial statement analysis? 1) External analysis This analysis is performed by external stakeholders like lenders, suppliers, investors, and governments. 2)

Filer Manufacturing has 8.9 million shares of common stock outstanding. The current share price is $59, and the book value per share is $4. Filer Manufacturing also has two bond is

Question 1 Describe the importance of commodity finance and sensitive commodities Question 2 Securities purchased by a bank for investment purposes are referred to as seconda

What are the types of Inventory cost? Explain the elements of inventory cost also. Types: 1. Ordering cost    2. Holding cost Elements: 1. Unit cost  2. Reordering

Principles of Good Regulation While performing its functions, the FSA needs to take into account certain matters which are termed the ‘principles of good regulation'. The matte

limitations of historical cost

Q. Short terms working capital? 1) Indigenous bankers: private money leased and other country banking used to be the only source of finance prior to the establishment of the

CAPITALISATION RATE=0.01 EARNINGS PER SHARE(E)=10 ASSUME RATE OF RETURNS ON INVESTMENTS (R):15