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 post-acquisition integration, Post-acquisition integration In o...

Post-acquisition integration In order to have constructive discussions between organisations, it's strongly recommended that all participants in process adopt a set of ground r

What is debentures, Q. What is Debentures? Debentures a debenture is an...

Q. What is Debentures? Debentures a debenture is an instrument issued by the company acknowledge its debts to its holders . it is also an important method of raising long terms

No title, discuss the steps in the controlling process

discuss the steps in the controlling process

Project budgets and reporting systems, Project Budgets and Reporting System...

Project Budgets and Reporting Systems: In many cases, where a project is initiated and a budget allocated, a separate account is created to ensure costs attributable to that pr

Analysis of financial plans, Part 1: Contingency plan Create contingency pl...

Part 1: Contingency plan Create contingency plans for the following scenarios: > One of your highly qualified consultants has given three months notice and is planning to move to a

Investment objectives, Investment Objectives: Any investment should alw...

Investment Objectives: Any investment should always start with identifying its objective. Thus, the first step in the pension fund investment management system is defining the

Compute the weighted average cost of capital, Q. Compute the weighted avera...

Q. Compute the weighted average cost of capital? A company's subsequent to tax specific cost of capital are as follows: Cost of debt

What do you understand by business cycle, Q. What do you understand by Busi...

Q. What do you understand by Business cycle? Business cycle: business cycle refers to the alternate expansion and contraction in the general business activity. in a period of t

Why investment decision depend on financing decision, Why investment decisi...

Why investment decision depend on financing decision All these decisions interact, investment decision cannot be taken without taking the financing decision, working capital de

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