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
the procedures, techniques or strategies that could or should be implemented to reduce the likelihood of harm > actions that could be taken to eliminate the hazard or reduce the r

Features of government securities: Issuers The government securities are issued by the central government, state governments, and semi-government authorities like municipa

1. The Gulf had sales of  AED 20,000,000 and cost of goods sold of  AED 10,250,000. Selling and administrative expenses represented 8 percent of sales. Depreciation was 5 percent o

Explain the Sovereign Risk Sovereign risk denotes a country imposing exchange restrictions on a currency included in a swap making it expensive, or not possible, for a counterp

Comment on the subsequent statement: “Since the U.S. imports more than it exports, it is essential for the U.S. to import capital from foreign countries to finance its current acco

1. What is a venture's present value? Does the past matter? What is meant by the statement, "If you are not using estimates, you are not doing a valuation?" 2. Define (a) requ


IMPORTANT FACTORS FOR  SUCCESSFUL BUDGETARY CONTROL 1. Clearly defined organization structure. 2. Top management support. 3. Reporting of deviations 4. Efficient acco

Analysis of Company Position Associated International Supplies Ltd Circulation: Associated International Supplies Ltd (AIS Ltd.) Author: A. Consultant, AXY Consultin

What were the main objectives of the Bretton Woods system? Answer: The major objectives of the Bretton Woods system are to acquire exchange rate stability and promote internation