Why The T-Strip Is A Nice Investment Tool
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 example, a 10-year note which is freshly will be stripped into twenty interest payments, 2 yearly or semi-annually for 10 years and one principal payment payment due at maturity date. All the 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. 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 no distinction 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.
T Strips Provide Risk Free Investing
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.
STRIPS components can be reconstituted together into a fully constituted U. S. backed security in the commercial book-entry system. For this to happen, the licensed financial agent must conmbine the right principal component along with all the unmatured interest components. When the minimum amounts of the components are brought together, the security is said to be reconstituted.
Treasury STRIPS are much more prevalent 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. - 23162
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 example, a 10-year note which is freshly will be stripped into twenty interest payments, 2 yearly or semi-annually for 10 years and one principal payment payment due at maturity date. All the 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. 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 no distinction 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.
T Strips Provide Risk Free Investing
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.
STRIPS components can be reconstituted together into a fully constituted U. S. backed security in the commercial book-entry system. For this to happen, the licensed financial agent must conmbine the right principal component along with all the unmatured interest components. When the minimum amounts of the components are brought together, the security is said to be reconstituted.
Treasury STRIPS are much more prevalent 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. - 23162
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Looking for Zero-coupon Securities? Contact http://www.wallstreetcapitalfinancing.com at 1-877-278-7823 for more information. Also have MTN's, BG's, & offering Business Loan.
posted by X - Men @ 9:37 AM
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