Why The T-Strip Is A Nice Investment Tool
A STRIP is the acronym or it stands for Separate Trading of Registered Interest and Principal Securities. Zero-coupon securities which have maturities longer than a period of one year are not available for issue by the US Treasury, so it has created a program called the STRIPS program, where the principal payments and interest payments or coupons of standard Treasury securities can be broken or disintegrated and traded separately as zero-coupon securities.
How It All Began
People call then T-STRIPS due to the fact that they are issued by the Treasury. The background behind the start of T-Bill trading took a path closely related to the dawn of the computer age. In the era of break dancing, rubics cube, and parachute pants, there was a new method of investing that was being born on the technological backbone of new computer software and hardware. T-Strip trading was much different than the old style coupon tearing of the old style zero coupon bonds. The US Treasury made the new form official by passing out identifications for the new STRIPS called a CUSIP code.
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 example, a 10-year note which is just will be stripped into twenty interest payments, two for each year or semi-annually for 10 years and one principal payment payment due at maturity date. All twenty interest payments plus the single principal payment are broken up into STRIPS form, each one 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 referred to as Treasury STRIPS.
These Treasury STRIPS are separate zero-coupon securities. Nothing is different about them at all from the zero-coupon securities. In fact, to an investor, there is not a difference between a coupon strip and principal strip, although in reality the Treasury STRIPS are not identically the same. In this example, all twenty one coupons have a unique identifying number called the CUSIP number.
The STRIPS program requires that the "stripped" treasury securities are maintained in a book entry form with the fed wire. This enables the "strips" to be easily tracked, therefore making individual trading of the security possible.
T Strips Are Risk Free
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.
Treasury STRIPS allows liquidity in the marketplace because it gives investors several maturity options. Similar to other zero-coupon instruments STRIPS can be used to meet a wide range of objectives because they are definitely going to have cash-flow values at specific future dates. They are appealing to investors with specific opinions in regards to interest rates, because prices of STRIPS are exceptionally sensitive to fluctuations in interest rates.
STRIPS are more attractive when short-term interest rates are down. At these times short term bank rates and reinvesting bond proceeds are not pleasing. T- Strips, being zero-coupon securities, do not have reinvestment risk.
Article Source: FxTradingStock.com
About the Author
Looking for Treasury strips? Contact http://www.wallstreetcapitalfinancing.com at 1-877-278-7823 for more information.
.
by: Brandon Hillman
Total views: 262
Word Count: 615
Date: Wed, 15 Apr 2009
Publish/Share this article
To use this article on your site click here to get the HTML code
Rating: Not yet rated
Login to vote
Related Articles
How to Invest in 2011 and Beyond Without a ClueWhat Is Forex Trading?
Quick Way To Trade In Shares
ATM Calendar Spreads, Are You Aware Of The Hidden Gotchas?
Emini Day Trading Requirements
The Coming Death Of The Dollar
Fantastic Fundraising Suggestions
Winning Big In The Share Market
