Michael Weiner CV
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Sunday, October 18, 2009
Saturday, October 17, 2009
It is widely believed that 99% of transactions never close. That is nothing new. But that number doesn't have to be this high if people are more sane about making a transaction work. That includes everyone from the seller, intermediary, and buyer.
What blows a deal? Well, the vast majority of times, it is the brokers in the chain. They are not the only ones of course, and sometimes they are blamed when the real culprit was the buyer or seller. One or more of them will do something stupid and inappropriate, like demanding a fee pay agreement before they will let the information about the seller's product go out.
I can name a number of deal-killers that, if corrected, could lower that 99% deal-death-rate (DDR).
Broker Insists on FPA first. That's like walking into a job interview and demanding to know your salary before you've even sold yourself. It demonstrates where that brokers' priorities are, and is a major turn-off to everyone in the deal. (It is my opinion that the reason buyers and sellers will circumvent the intermediaries is because of this and other interferences below).
No Transparency. Someone in the chain stops communication between the principal buyer and seller. The broker's job is to create a clear path from seller to buyer.
Unclear Communication. An error of omission is the same as commission.Full and specific instrument descriptions that are more than just a price and contract size. Upfront disclosure of who the buyer is (the fear of circumvention kills the deal every time.
Misrepresentation of Material Facts. One of the most heinous of the DDR's. Also one that can land a person in the hands of the authorities. From a broker representing him/her self as a principal player (buyer, buyer rep, seller, seller rep), or someone changing documents fraudulently, sometimes the words used can trap one into misrepresenting something materially important.
More Than 1 Buyer and 1 Seller Intermediary. It is astounding how many brokers will just pass a name or an email and expect to be compensated the same amount as those doing the heavy lifting. When more than one intermediary per side are involved, these squabble flare up, BEFORE THERE IS EVEN A DEAL! Keeping the loop tight with only a max of 2 intermediaries, allows the communication to happen between the buyer and seller principals. If others have made an introduction, they share in the Referral Fee pool. Many deal-makers will take a percentage of the amount paid to them, such as 10%, and that amount is divided equally among the Referral people.
Of course, this is a short list of contributors to the high percentage of DDR's. You may have others. Comments and other deal killers you have seen are welcome. Send to info@bgmtn.com
What blows a deal? Well, the vast majority of times, it is the brokers in the chain. They are not the only ones of course, and sometimes they are blamed when the real culprit was the buyer or seller. One or more of them will do something stupid and inappropriate, like demanding a fee pay agreement before they will let the information about the seller's product go out.
I can name a number of deal-killers that, if corrected, could lower that 99% deal-death-rate (DDR).
Broker Insists on FPA first. That's like walking into a job interview and demanding to know your salary before you've even sold yourself. It demonstrates where that brokers' priorities are, and is a major turn-off to everyone in the deal. (It is my opinion that the reason buyers and sellers will circumvent the intermediaries is because of this and other interferences below).
No Transparency. Someone in the chain stops communication between the principal buyer and seller. The broker's job is to create a clear path from seller to buyer.
Unclear Communication. An error of omission is the same as commission.Full and specific instrument descriptions that are more than just a price and contract size. Upfront disclosure of who the buyer is (the fear of circumvention kills the deal every time.
Misrepresentation of Material Facts. One of the most heinous of the DDR's. Also one that can land a person in the hands of the authorities. From a broker representing him/her self as a principal player (buyer, buyer rep, seller, seller rep), or someone changing documents fraudulently, sometimes the words used can trap one into misrepresenting something materially important.
More Than 1 Buyer and 1 Seller Intermediary. It is astounding how many brokers will just pass a name or an email and expect to be compensated the same amount as those doing the heavy lifting. When more than one intermediary per side are involved, these squabble flare up, BEFORE THERE IS EVEN A DEAL! Keeping the loop tight with only a max of 2 intermediaries, allows the communication to happen between the buyer and seller principals. If others have made an introduction, they share in the Referral Fee pool. Many deal-makers will take a percentage of the amount paid to them, such as 10%, and that amount is divided equally among the Referral people.
Of course, this is a short list of contributors to the high percentage of DDR's. You may have others. Comments and other deal killers you have seen are welcome. Send to info@bgmtn.com
Buyer/Seller Relationships Are Key To A Transaction
New Relationships Of Trust: Essential!
There is a wide gulf between Buyer's and Seller's that prevents many opportunities for a transaction. Much of that gulf is because of nonsense stirred up by brokers who have no real experience, and insist on superimposing control over the communication flow. If you're an intermediary, make the connection and then get the hell out of the way and let them talk. If you are so paranoid about being cut out of the deal, congratulations; you just created a self-fulfilling prophecy!
I am convinced that the reason for the transactions that end up with someone circumventing is because a broker interfered with the absolute clear communication channel between the two Principals. CAGTHOOFW!! (Connect And Get The Hell Out Of The Way)
How To NEVER Get A Seller To Respond
In the automotive industry, salespeople are taught to recognize 'tire kickers'-- those people who will ask questions but really have no intention of buying anything. Usually, once it becomes evident that they have a 'tire kicker' on their hands, they move away and pay no further attention.
What is astounding is how many Buyer's for paper fall into the 'tire kicker' category by their actions. Here are a couple of reasons why a seller will ignore and not even dignify a 'tire kicker' with a response:
1. The Buyer (or his "representative") will ask a question about a particular procedure that he would like. On the surface, you might say, 'that's a reasonable question-- why can't I get an answer before I might send in my documents?"
Put yourself in the Seller's shoes for a minute. In the course of his day, the Seller is bombarded with the same questions dozens of times. The Seller doesn't have any interest in answering questions.
In fact, many of the Providers and Sellers have given us Standing Orders:
It is a matter of courtesy and respect. Something that is sorely missing in the high-faluting world of high finance-- at least those in the intermediary pool, and yes, some Buyers and even Sellers.
If you are a serious Buyer and you want to set yourself apart from the 'tire kickers' out there, submit your Letter of Request, Client Information Sheet and your Passport, and THEN ask your questions. You'll be given the courtesy of a response because you have shown your intentions, and not to waste time.
2. A Buyer insists on speaking to the Seller before he will even submit anything. For the same reason above, the Seller isn't sitting around waiting for the Buyer to want to chat. How can a Seller know if he is wasting his time unless he has the Buyer's papers in hand and can respond intelligently?
Again, this is a sure sign of a 'tire kicker'. And, again, as direct representatives to the Seller, we are given our orders.
There is a legal principle here that each individual party in a transaction must remember:
If It Isn't In Writing, It Doesn't Exist.
By Michael Weiner
There is a wide gulf between Buyer's and Seller's that prevents many opportunities for a transaction. Much of that gulf is because of nonsense stirred up by brokers who have no real experience, and insist on superimposing control over the communication flow. If you're an intermediary, make the connection and then get the hell out of the way and let them talk. If you are so paranoid about being cut out of the deal, congratulations; you just created a self-fulfilling prophecy!
I am convinced that the reason for the transactions that end up with someone circumventing is because a broker interfered with the absolute clear communication channel between the two Principals. CAGTHOOFW!! (Connect And Get The Hell Out Of The Way)
How To NEVER Get A Seller To Respond
In the automotive industry, salespeople are taught to recognize 'tire kickers'-- those people who will ask questions but really have no intention of buying anything. Usually, once it becomes evident that they have a 'tire kicker' on their hands, they move away and pay no further attention.
What is astounding is how many Buyer's for paper fall into the 'tire kicker' category by their actions. Here are a couple of reasons why a seller will ignore and not even dignify a 'tire kicker' with a response:
1. The Buyer (or his "representative") will ask a question about a particular procedure that he would like. On the surface, you might say, 'that's a reasonable question-- why can't I get an answer before I might send in my documents?"
Put yourself in the Seller's shoes for a minute. In the course of his day, the Seller is bombarded with the same questions dozens of times. The Seller doesn't have any interest in answering questions.
In fact, many of the Providers and Sellers have given us Standing Orders:
DO NOT BRING A QUESTION TO ME UNLESS IT IS ACCOMPANIED BY THE BUYERS COMPLIANCE DOCUMENTS AND LETTER OF REQUEST.
It is a matter of courtesy and respect. Something that is sorely missing in the high-faluting world of high finance-- at least those in the intermediary pool, and yes, some Buyers and even Sellers.
If you are a serious Buyer and you want to set yourself apart from the 'tire kickers' out there, submit your Letter of Request, Client Information Sheet and your Passport, and THEN ask your questions. You'll be given the courtesy of a response because you have shown your intentions, and not to waste time.
2. A Buyer insists on speaking to the Seller before he will even submit anything. For the same reason above, the Seller isn't sitting around waiting for the Buyer to want to chat. How can a Seller know if he is wasting his time unless he has the Buyer's papers in hand and can respond intelligently?
Again, this is a sure sign of a 'tire kicker'. And, again, as direct representatives to the Seller, we are given our orders.
There is a legal principle here that each individual party in a transaction must remember:
If It Isn't In Writing, It Doesn't Exist.
By Michael Weiner
Leased Instruments: Collateral for Credit Facilities
Five Million US Dollar Minimum
Do you have a transaction for which you require collateral?
Product Overview
We've just unveiled a new product to the marketplace which does not put the client's initial funds at risk.
No funds are released from escrow until after an acceptable instrument has been received by the client's lending institution from an acceptable issuing bank.
These instruments may be used as the primary and/or only source of collateral for a credit facility.
Do you have a transaction for which you are trying to obtain funding through your lender and need a source of collateral that's safe and reliable?
The issuance fees are not put at risk, they are simply put into any mutually acceptable third party escrow account where they will stay until acceptable collateral is delivered as agreed;
We may even be able to allow an acceptable bank pay order for the payment of fees contingent upon delivery of acceptable collateral.
Our bank communicates with your bank prior to deployment and execution of agreements. We are not leasing or joint venturing to provide assets, we are issuing our clients' lender an irrevocable guarantee of principal and interest paid at maturity.
The bank instruments can be used for any legitimate, legal financial transaction where a client has the ability to get a loan with his lender with acceptable collateral. Read below for additional details.
Requirements
1. Client must have their bank financing arranged conditionally upon the presentation of acceptable collateral from an acceptable bank.
2. Client must provide a conditional commitment letter from their bank addressed to the client (sample format downloadable)
3. Client must have 1.75% of the required instrument.
Steps
1. Client applies to POF
a. Client provides POF letter of intent
b. Client provides POF a completed application and supporting documents
2. POF issues documents to the client
a. Term sheet
b. Letter of Intent
c. Engagement fee request letter
d. Sample conditional commitment letter
3. Client sends $10,000.00 non-refundable engagement fee to POF.
4. Client sends POF the conditional commitment letter provided by the bank.
5. Client moves their 1.75% of the required instrument size to an acceptable escrow attorney. Escrowed monies are not released from escrow until after the instrument is delivered.
6. POF's bank contacts the clients bank at the coordinates provided in the conditional commitment letter.
a. Banks discuss and come to terms on acceptable instrument text.
b. Banks discuss and come to terms on acceptable instrument transmission (delivery).
7. POF orders its bank to initiate and finalize the transaction between the banks.
8. POF's bank delivers the instrument of principal and interest to the clients bank.
9. Client's receiving bank receives the previously agreed upon bank debt instrument upon acknowledging its acceptance confirms this with its client and escrow attorney.
10. Client's 1.75% is released from escrow to POF.
11. 15 Days from the date of the banks acceptance and acknowledgment of the bank debt instrument, the client releases 6.75% to POF. (Drawn down from new credit line)
12. Client's bank funds the loan
13. Client bank deposits the proceeds of the loan into the bank who issued the bank debt instrument or to mutually consented coordinates from which monetary draws will be made by the client in conformity with his transactional requirements.
14. On the 91st day the client begins making principal and interest payments at LIBOR (+ floating rate*) to POF or to its order until the loan has been paid as agreed.
15. Client's bank perfects payment on the bank instrument at its maturity date (12 months from its date of issue).
Footnote:
*Floating Rate would be determined in review of the transaction after we've received the bank letter and our bank has communicated with the clients' bank.
Issuing Banks
1. HSBC in London
2. HSBC in New York
3. JP Morgan Chase in New York
4. Wells Fargo Bank in California
Pricing is a moderate total of 8.5% for the use of the instrument and on month three the client begins making principal and interest payments at Libor + a floating rate (*Floating Rate would be determined in review of the transaction after we've received the bank letter and our bank has communicated with the clients bank.) There are several benefits to the structure we are now offering.
1. Once the clients' bank provides the client the conditional commitment letter our bank opens up a line of communication to agree upon instrument type, text and delivery protocols.
2. Transactions can be as small as $5 million United States Dollars.
3. You can spend your time with clients that have real closeable transactions, clients do not lose money and we do not lose time spent on clients with no transactions.
4. Other than the engagement fees which covers expenses of the attorney documentation, initial due diligence, etc., No moneys are released from escrow until the clients bank receives the acceptable collateral from a bank acceptable to them.
5. There is bank to bank communication by phone, fax and/or Swift prior to entering into a final contract with Provider to make sure POF and the client are not wasting any time or energy.
6. The client makes no payments to his lender whatsoever.
7. The instrument can be the primary and/or only collateral used to support the clients credit facility.
8. The client can get a loan from many different types of creditors to include but not limited to the following.
a. Banks
1. Private Banks
2. Commercial Banks
3. Retail Banks
4. Investment Banks
5. Central Banks
b. Credit Unions
c. Saving & Loan Banks
d. Angel Investors
e. Equity Investors
f. Brokerage Firms
g. Hedge Funds
h. Investment Funds
i. Pension Funds
j. Venture Capital Firms
k. Private equity firms
Submit an application today along with documentary evidence of your ability to pay the 1.75% upon receipt of an acceptable instrument. Send to paper@pccfunding.com.
To download a copy of this memorandum, click here.
Do you have a transaction for which you require collateral?
Product Overview
We've just unveiled a new product to the marketplace which does not put the client's initial funds at risk.
No funds are released from escrow until after an acceptable instrument has been received by the client's lending institution from an acceptable issuing bank.
These instruments may be used as the primary and/or only source of collateral for a credit facility.
Do you have a transaction for which you are trying to obtain funding through your lender and need a source of collateral that's safe and reliable?
The issuance fees are not put at risk, they are simply put into any mutually acceptable third party escrow account where they will stay until acceptable collateral is delivered as agreed;
We may even be able to allow an acceptable bank pay order for the payment of fees contingent upon delivery of acceptable collateral.
Our bank communicates with your bank prior to deployment and execution of agreements. We are not leasing or joint venturing to provide assets, we are issuing our clients' lender an irrevocable guarantee of principal and interest paid at maturity.
The bank instruments can be used for any legitimate, legal financial transaction where a client has the ability to get a loan with his lender with acceptable collateral. Read below for additional details.
Requirements
1. Client must have their bank financing arranged conditionally upon the presentation of acceptable collateral from an acceptable bank.
2. Client must provide a conditional commitment letter from their bank addressed to the client (sample format downloadable)
3. Client must have 1.75% of the required instrument.
Steps
1. Client applies to POF
a. Client provides POF letter of intent
b. Client provides POF a completed application and supporting documents
2. POF issues documents to the client
a. Term sheet
b. Letter of Intent
c. Engagement fee request letter
d. Sample conditional commitment letter
3. Client sends $10,000.00 non-refundable engagement fee to POF.
4. Client sends POF the conditional commitment letter provided by the bank.
5. Client moves their 1.75% of the required instrument size to an acceptable escrow attorney. Escrowed monies are not released from escrow until after the instrument is delivered.
6. POF's bank contacts the clients bank at the coordinates provided in the conditional commitment letter.
a. Banks discuss and come to terms on acceptable instrument text.
b. Banks discuss and come to terms on acceptable instrument transmission (delivery).
7. POF orders its bank to initiate and finalize the transaction between the banks.
8. POF's bank delivers the instrument of principal and interest to the clients bank.
9. Client's receiving bank receives the previously agreed upon bank debt instrument upon acknowledging its acceptance confirms this with its client and escrow attorney.
10. Client's 1.75% is released from escrow to POF.
11. 15 Days from the date of the banks acceptance and acknowledgment of the bank debt instrument, the client releases 6.75% to POF. (Drawn down from new credit line)
12. Client's bank funds the loan
13. Client bank deposits the proceeds of the loan into the bank who issued the bank debt instrument or to mutually consented coordinates from which monetary draws will be made by the client in conformity with his transactional requirements.
14. On the 91st day the client begins making principal and interest payments at LIBOR (+ floating rate*) to POF or to its order until the loan has been paid as agreed.
15. Client's bank perfects payment on the bank instrument at its maturity date (12 months from its date of issue).
Footnote:
*Floating Rate would be determined in review of the transaction after we've received the bank letter and our bank has communicated with the clients' bank.
Issuing Banks
1. HSBC in London
2. HSBC in New York
3. JP Morgan Chase in New York
4. Wells Fargo Bank in California
Pricing is a moderate total of 8.5% for the use of the instrument and on month three the client begins making principal and interest payments at Libor + a floating rate (*Floating Rate would be determined in review of the transaction after we've received the bank letter and our bank has communicated with the clients bank.) There are several benefits to the structure we are now offering.
1. Once the clients' bank provides the client the conditional commitment letter our bank opens up a line of communication to agree upon instrument type, text and delivery protocols.
2. Transactions can be as small as $5 million United States Dollars.
3. You can spend your time with clients that have real closeable transactions, clients do not lose money and we do not lose time spent on clients with no transactions.
4. Other than the engagement fees which covers expenses of the attorney documentation, initial due diligence, etc., No moneys are released from escrow until the clients bank receives the acceptable collateral from a bank acceptable to them.
5. There is bank to bank communication by phone, fax and/or Swift prior to entering into a final contract with Provider to make sure POF and the client are not wasting any time or energy.
6. The client makes no payments to his lender whatsoever.
7. The instrument can be the primary and/or only collateral used to support the clients credit facility.
8. The client can get a loan from many different types of creditors to include but not limited to the following.
a. Banks
1. Private Banks
2. Commercial Banks
3. Retail Banks
4. Investment Banks
5. Central Banks
b. Credit Unions
c. Saving & Loan Banks
d. Angel Investors
e. Equity Investors
f. Brokerage Firms
g. Hedge Funds
h. Investment Funds
i. Pension Funds
j. Venture Capital Firms
k. Private equity firms
Submit an application today along with documentary evidence of your ability to pay the 1.75% upon receipt of an acceptable instrument. Send to paper@pccfunding.com.
To download a copy of this memorandum, click here.
Waiting For ISIN's And CUSIP's Guarantee Failure To Buy
Many buyers have requested or insisted on seeing information on specific instruments before they will make their interest known.
This flawed approach to buying FAILS NEARLY EVERY TIME! Why?
Since analogies are a great way to illustrate a point, imagine that you want to ride the train (i.e.- buy an instrument).
All day long, trains keep coming and going (instruments for sale), and they are ridden (i.e.- bought), by other riders who have already presented their tickets (i.e.-been accepted as a bonafide buyer by the seller), from the ticketmaster (the trade platform manager).
The reason so many deals never make it is because you cannot wait for a train to come into the station before you decide if you want to ride it!
You first have to buy a ticket (present your LOI, CIS, Passport, LOA, etc) so the ticketmaster (the seller) can OK you to climb aboard the next train.
Once you have bought your 'ticket', you are now entitled to stand on the platform waiting for the next train (instrument) that is the right one to jump on (take down).
The trains are always coming and going, but the ticketmaster won't allow you to board an oncoming train until you have been cleared and shown your capacity to buy.
When you ask to see a specific instrument's identification, you are asking about a train that is already in the station and is in the midst of being boarded (taken down) by another buyer.
Too late! You have to be timed so that the seller has your ticket BEFORE the next train comes down the track.
Also, when the buyer wants to see ISIN and CUSIP numbers, they are again asking about a train that is about to leave the station.
If you know you are going to ride the train, get your ticket (documents) punched so you can jump on the next train coming. Be prepared.
When the train has pulled into the station is NOT the time to first get your ticket and get on board-- the train will leave the station long before you get your ticket. That's why you may have found that paper you were interested in has been sold out from under you.
Timing is everything, and being on the platform when the train comes in is the only way to buy your paper.
By Michael Weiner
This flawed approach to buying FAILS NEARLY EVERY TIME! Why?
Since analogies are a great way to illustrate a point, imagine that you want to ride the train (i.e.- buy an instrument).
All day long, trains keep coming and going (instruments for sale), and they are ridden (i.e.- bought), by other riders who have already presented their tickets (i.e.-been accepted as a bonafide buyer by the seller), from the ticketmaster (the trade platform manager).
The reason so many deals never make it is because you cannot wait for a train to come into the station before you decide if you want to ride it!
You first have to buy a ticket (present your LOI, CIS, Passport, LOA, etc) so the ticketmaster (the seller) can OK you to climb aboard the next train.
Once you have bought your 'ticket', you are now entitled to stand on the platform waiting for the next train (instrument) that is the right one to jump on (take down).
The trains are always coming and going, but the ticketmaster won't allow you to board an oncoming train until you have been cleared and shown your capacity to buy.
When you ask to see a specific instrument's identification, you are asking about a train that is already in the station and is in the midst of being boarded (taken down) by another buyer.
Too late! You have to be timed so that the seller has your ticket BEFORE the next train comes down the track.
Also, when the buyer wants to see ISIN and CUSIP numbers, they are again asking about a train that is about to leave the station.
If you know you are going to ride the train, get your ticket (documents) punched so you can jump on the next train coming. Be prepared.
When the train has pulled into the station is NOT the time to first get your ticket and get on board-- the train will leave the station long before you get your ticket. That's why you may have found that paper you were interested in has been sold out from under you.
Timing is everything, and being on the platform when the train comes in is the only way to buy your paper.
By Michael Weiner
Why MT 103/23 isn't the Devil
Why should a MT103/23
NOT Be An Issue
For A Buyer?
It is true that some sellers will use the buyer's MT103/23 to take down the paper.
My question to the buyer is, "So What?"
If the buyer is getting paper at the price he accepts, and then gets the paper, why should he care that the seller is actually being smart and using Other People's Money to make a deal happen?
Buyer's claim they don't want to 'finance' the purchase of the paper that they want, but the truth is they are already financing it within in the price at which the seller will sell.
Again, So What?
The objective for the buyer is to buy the paper. What happens before he gets his paper really isn't his business.
Compare it to ordering a custom built car from a car dealer.
The car hasn't been built yet-- but the Buyer is STILL required to make a deposit before the manufacturer builds it.
The car dealership isn't using its money to make the order happen, but he is making a profit on the sale. It's exactly the same business process.
The Bottom Line is: Did you get the paper that you wanted at an acceptable price?
After all, isn't that all that really matters?
By Michael Weiner
NOT Be An Issue
For A Buyer?
It is true that some sellers will use the buyer's MT103/23 to take down the paper.
My question to the buyer is, "So What?"
If the buyer is getting paper at the price he accepts, and then gets the paper, why should he care that the seller is actually being smart and using Other People's Money to make a deal happen?
Buyer's claim they don't want to 'finance' the purchase of the paper that they want, but the truth is they are already financing it within in the price at which the seller will sell.
Again, So What?
The objective for the buyer is to buy the paper. What happens before he gets his paper really isn't his business.
Compare it to ordering a custom built car from a car dealer.
The car hasn't been built yet-- but the Buyer is STILL required to make a deposit before the manufacturer builds it.
The car dealership isn't using its money to make the order happen, but he is making a profit on the sale. It's exactly the same business process.
The Bottom Line is: Did you get the paper that you wanted at an acceptable price?
After all, isn't that all that really matters?
By Michael Weiner
The T-Strip is An Investment
It Sounds Like A Steak, But It Isn't . . . The T-Strip is An Investment
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. History of T-StripsPeople 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 issued will be stripped into 20 interest payments, 2 annually 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. 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. As a matter of 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 the example given, all the twenty one coupons have its own unique identifying number or the CUSIP number. When a T Strip is stripped through the commercial book-entry system each interest payment and the principal payment becomes a separate zero-coupon security. At this time, each component of the T-strip is given its own identifying number called the CUSIP number and can be held or traded separately.
T-Strips Provide Risk Free InvestingThe 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 financial markets because it provides investors with many 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 a known future date. They are attractive to investors with specific opinions regarding interest rates, because prices of STRIPS are exceptionally susceptible to fluctuations in interest rates.
STRIPS are more attractive when short-term interest rates are low. At these times short term bank rates and reinvesting bond proceeds are not alluring. T- Strips, being zero-coupon securities, do not have reinvestment risk.
By Dan Chandler
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