T-Strips are an interesting investment tool that really is being used in the current economy more and more due to the safety net it provides. The word “STRIPS” is an acronym which stands for “Separate Trading of Registered Interest and Principal Securities.” The thing unique about T-Strips is the fact that the coupons may be seperated from the principal of the coupons and traded seperately as zero coupon securities. This is especially important to banks, corporations, and large investors looking for a safe investment.
How It All Began
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 the STRIP program, a financial institution can present the US Treasury with a standard Treasury note, Treasury Bond or TIPS (Treasury Inflation- protected Security) to be “stripped.” The Treasury then breaks or disintegrates the individual flows of cash into separate securities, after which it is returned to the financial institution.
For example, a 10-year note which is newly will be stripped into twenty interest payments, 2 yearly or semi-annually for 10 years and one principal payment payment due at maturity date. All the twenty interest payments plus the single principal payment are broken up into STRIPS form, 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. Together 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. In fact, to an investor, there is no distinction 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 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.
T Strips Provide Risk Free Investing
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 tochose from. Like other zero-coupon instruments STRIPS can be utilized to meet a wide range of investment goals because they are known to have cash-flow values at a known future date. They are appealing to investors with their own opinions regarding interest rates, because prices of STRIPS are exceptionally sensitive to fluctuations in interest rates.
Treasury STRIPS are much more fashionable in times like today when the short-term interest rates are at their lowest. Investors don’t want 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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