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

Divisional performance evaluation, In modern strategic management accountin...

In modern strategic management accounting it is important to use appropriate performance measurements and control concepts, underpinned by theories and models applied in a variety

Functions of financial manager, Functions of Financial Manager: - The finan...

Functions of Financial Manager: - The financial manager is a associate of top management. He is intimately associated with the formulation of financial policies as well as financia

Explain the demand for bananas increases, Suppose the demand for bananas in...

Suppose the demand for bananas increases. Explain how the price of bananas adjusts after the increase in demand. If the demand for bananas rises, a shortage is made at the origin

Delivery and credit risk, When a borrower uses repo market for fund f...

When a borrower uses repo market for fund financing, he has to deliver the securities to the lender. One way to do this is to deliver the collateral to the lender

Distinguish between a credit card and a debit card, QUESTION (a) What a...

QUESTION (a) What are the main benefits of E-Banking to customers and banking institutions? (b) Internet Banking products and services are of two primary types, informationa

State about the capital structure of financial risk, State about the capita...

State about the capital structure of financial risk Frequently the funds supplied to a firm by lenders will change its financial structure and charge for the funds would be bas

Determine the method of credit rating, Determine the method of Credit Ratin...

Determine the method of Credit Rating It is obligatory for the issuing companies to get credit rating done on debt securities issues. Credit ratings are also required for Comme

Irr and npv, (a) Lonesome Gulch Mines has a standard deviation of 42% per ...

(a) Lonesome Gulch Mines has a standard deviation of 42% per year and a beta of 0.10.  Amalgamated Copper has a standard deviation of 31% a year and a beta of 0.66.

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