T-Strip are a great investment tool if you know what they are. The term STRIP is an acronym which stands for "Separate Trading of Registered Interest and Principal Securities." T Strips are U.S. Treasury securities that are issues by the Treasury for zero-coupon securities which have a maturity period over one year. The STRIPS program gives investors much more flexiblity in how they trade for the securities.
Background Information Behind Treasury 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.
For instance, a 10-year note which is newly will be stripped into twenty interest payments, two for each year or semi-annually for ten and one principal payment payment due at maturity date. All 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. Jointly they are called Treasury STRIPS.
These Treasury STRIPS are separate zero-coupon securities. Nothing is different about them at all from the zero-coupon securities. As a matter of fact, to an investor, there is not a difference between a coupon strip and principal strip, although technically the Treasury STRIPS are not identical. In the example given, 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.
Risk-Free Investing Using United States Treastury Strips
The Treasury STRIPS normally mature over ten years out to thirty years. They are backed by the US government which makes them risk-free credits. STRIPS are not issued or sold directly to investors, only financial institutions such as investment banks and brokerage firms; government securities brokers and dealers can hold and purchase it.
STRIPS components can be reconstituted together into a fully constituted U. S. backed security in the commercial book-entry system. In order to reconstitute each security, the licensed financial dealer must conmbine the right principal component along with all its unmatured interest components. When the minimum amounts of the components are brought together, the security is considered 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.
Background Information Behind Treasury 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.
For instance, a 10-year note which is newly will be stripped into twenty interest payments, two for each year or semi-annually for ten and one principal payment payment due at maturity date. All 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. Jointly they are called Treasury STRIPS.
These Treasury STRIPS are separate zero-coupon securities. Nothing is different about them at all from the zero-coupon securities. As a matter of fact, to an investor, there is not a difference between a coupon strip and principal strip, although technically the Treasury STRIPS are not identical. In the example given, 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.
Risk-Free Investing Using United States Treastury Strips
The Treasury STRIPS normally mature over ten years out to thirty years. They are backed by the US government which makes them risk-free credits. STRIPS are not issued or sold directly to investors, only financial institutions such as investment banks and brokerage firms; government securities brokers and dealers can hold and purchase it.
STRIPS components can be reconstituted together into a fully constituted U. S. backed security in the commercial book-entry system. In order to reconstitute each security, the licensed financial dealer must conmbine the right principal component along with all its unmatured interest components. When the minimum amounts of the components are brought together, the security is considered 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.
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