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

Floor Brokers, Floor Brokers These people have the responsibility of ex...

Floor Brokers These people have the responsibility of executing the trades forwarded by the FCMs on the floor of the exchange. They can also trade for their own account. They w

What is public finance, What is Public Finance Central, state as well...

What is Public Finance Central, state as well as local governments handle large sums ofmoney, which are received from several sources and should be utilized in accordancewith

Explain that the u.s. imports more than it exports, Comment on the subseque...

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

Define the advantages of collecting early, What are the advantages of “coll...

What are the advantages of “collecting early” and how do companies attempt to do this? Money has time value.  The sooner cash is collected, the better.  Companies employ regional

Explain closed end country fund trade at premium or discount, Why do you th...

Why do you think closed-end country funds frequently trade at a premium or discount? Answer:  CECFs (closed-end country funds) trade at a premium or discount since capital market

Explain stronger dollar in the foreign exchange market, What kinds of U.S. ...

What kinds of U.S. companies would benefit most from a stronger dollar in the foreign exchange market?  Explain. U.S. companies that import merchandise from other countries wou

Cost of capital, The Nu-Nu Brothers Inc. (NNBI) has the following capital s...

The Nu-Nu Brothers Inc. (NNBI) has the following capital structure, which it considers to be optional: Debt 25% Preferred Stock 15% Common Equity 60% NNBI''''s expected net income

Wacc based on the president''s preference, Sapp Trucking's balance sheet il...

Sapp Trucking's balance sheet illustrates a total of noncallable $45 million long-term debt with a coupon rate of 7.00% and a yield to maturity of 6.00%.  This debt presently has a

Management of finacial institutions, what are the features of a comprehensi...

what are the features of a comprehensive interest rate risk management programme

Determine earnings per share, Q. Determine Earnings per share? Current ...

Q. Determine Earnings per share? Current earnings per share = 100 × (4550 - 225)/ 5000 = 86.5 cents Earnings per share after one year = 100 × (4508 - 225)/ 5000 = 85.7 cents

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