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STRIPS and TIPS

STRIPS and TIPS. Ming Fu April 30th. STRIPS = S eparate T rading of R egistered I nterest and P rincipal of S ecurities. Introduction of STRIPS. Coupon Stripping. Principal STRIPS (hen). Treasury B ond. Coupon STRIPS (eggs). History of STRIPS . COUGARs

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STRIPS and TIPS

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  1. STRIPS and TIPS Ming Fu April 30th

  2. STRIPS = Separate Trading ofRegistered Interest and Principal of Securities

  3. Introduction of STRIPS Coupon Stripping Principal STRIPS (hen) Treasury Bond Coupon STRIPS (eggs)

  4. History of STRIPS COUGARs By A.G. Becker Paribas CATS By Salomon Brothers LIONs By Lehman Brothers DOGs TIGRs By Merrill Lynch Dibs On Government Securities Certificates of Accrual on Treasury Securities Treasury Income Growth Receipts Coupon Government Accrual Receipts Lehman Investment Opportunities Notes

  5. An Example of STRIPS U.S. Treasury Bond 3 Years to Maturity Semiannual Coupons

  6. An Example of STRIPS (cont’d) • $1,000 principal with 12% Coupon rate and 8% Yield To Maturity $7 profit !!!

  7. Compare Yield to Maturity

  8. Summary of STRIPS Principal Coupons

  9. TIPS = TreasuryInflation Protection SecuritiesorTIIS = TreasuryInflation Index Securities First TIPS in 1997

  10. Introduction of TIPS Coupon payment= Adjusted Principal*fixed coupon rate U.S. Treasury Bond 3 Years to Maturity Semiannual Coupons Inflation Adjusted Principal= Principal*(1+inflation rate) *Inflation based on Consumer Price Index-Urban Consumers (CPI-U)

  11. An Example of TIPS 20.5=1025.15*2% 1025.15=1010+1010*1.5%

  12. An Example of TIPS (cont’d)

  13. Deflation on TIPS You have this safeguard at maturity: If the adjusted principal < the original principal You are paid the original principal! Coupons are still paid based on deflationary principal.

  14. 1983-2012 U.S. CPI-U (in %) Latest deflation in the U.S. was in 1954.

  15. Summary of TIPS • The great inflation hedge • No free lunch: opportunity cost Alternative investment: municipal bonds? We will see in Marcus’s presentation soon 

  16. Reference • http://www.treasurydirect.gov/indiv/research/indepth/tips/res_tips_faq.htm • http://www.treasurydirect.gov/indiv/research/indepth/tips/res_tips.htm • http://www.treasurydirect.gov/instit/research/faqs/faqs_basics.htm • http://www.raymondjames.com/fixed_income_tips.htm • http://www.jpmorgan.com/tss/General/Tips_on_TIPS/1300313797124%2Bcorrelation+of+nominal+and+real+yields&oe=utf-8&rls=org.mozilla%3Aen-GB%3Aofficial&client=firefox-a&channel=np&hl=en&ct=clnk • http://www.newyorkfed.org/aboutthefed/fedpoint/fed42.html • http://www.finra.org/Investors/InvestmentChoices/Bonds/SmartBondInvesting/typesofbonds/P133240 • http://seekingalpha.com/article/107144-tips-strips-redux

  17. Thank you!Questions?

  18. Appendix

  19. 35 TIPS

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