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