Treasury strips, Financial Management

Assignment Help:

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.


Related Discussions:- Treasury strips

What is a security?, What is a security? The Securities are claims on f...

What is a security? The Securities are claims on financial assets.  They can be explained as "claim checks" that give their owners the right to obtain funds in the future.  Sec

Capital budgeting case study, RWE Enterprises is a small manufacturer in Ad...

RWE Enterprises is a small manufacturer in Adelaide South Australia, feed suppliments for cattle. New production line NPV, Payback period and discounted payback period

Process of financing working capital, Q. Process of financing working capit...

Q. Process of financing working capital? Working capital policies on the process of financing working capital can be characterised as moderate, conservative and aggressive. A c

Illustrate the audit plans, Illustrate the audit plans Audit team must ...

Illustrate the audit plans Audit team must be sufficiently familiar and fully briefed by manager and have knowledge of the business or operation such that to be able to carry o

Capital Budgeting Decision Problem, SCL Ltd., a highly profitable company, ...

SCL Ltd., a highly profitable company, is engaged in the manufacture of power intensive products. As part of its diversification plans, the company proposes to put up a windmill to

Explain about the international finance, Explain about the International Fi...

Explain about the International Finance When money crosses international boundaries businesses,individualsand governments should deal with special kinds of problems. Every c

Describe personal financial management., Gary and Joyce Yau, both 30, last ...

Gary and Joyce Yau, both 30, last month bought their dream house in London, Ontario. The purchase price was $450,000 plus addition fees such as taxes, legal fees, administration fe

Savage friedman, Question: (a) Describe the axioms of utility. (b) An eco...

Question: (a) Describe the axioms of utility. (b) An economic agent has a logarithmic utility function, U(W) = lnw and has initial wealth $20,000. She is offered the subsequent g

Loans from the financial institutions, Loans from the financial institution...

Loans from the financial institutions: Financial institutions such as the commercial bank life insurance corporation, industries financial development corporation bank of the

Accounting to budget, Accounting to Budget: Accounting to budget is a c...

Accounting to Budget: Accounting to budget is a commonly used term to describe how an organisation controls its accounting process. Typically, an organisation divides its re

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd