STRIPS & TIPS Josh McBee. STRIPS – Separate Trading of Registered Interest and Principles of Securities.

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Presentation transcript:

STRIPS & TIPS Josh McBee

STRIPS – Separate Trading of Registered Interest and Principles of Securities

Bond  Interest  Principal $60 $1000 Type PMT SOLD Separate and Sell Individually

Bond Pricing Ex: 3yr semi-annual bond at 12%; YTM = 8% Bond Ex: 3yr semi-annual bond at 12%; YTM = 8% PeriodCalculationPV 1$60 x 1/(1.04) =$ $60 x 1/(1.04)^2 =$ $60 x 1/(1.04)^3 =$ $60 x 1/(1.04)^4 =$ $60 x 1/(1.04)^5 =$ $1060 x 1/(1.04)^6 =$ Price =$1,104.81

Stripped Bond Ex: 3yr semi-annual bond at 12%; YTM = 8% PeriodCalculationPV 1$60 x 1/(1+y) = 2$60 x 1/(1+y)^2 = 3$60 x 1/(1+y)^3 = 4$60 x 1/(1+y)^4 = 5$60 x 1/(1+y)^5 = 6$1060 x 1/(1+y)^6 = Price =

Stripped Bond Cont. Ex: 3yr semi-annual bond at 12%; YTM = 8% PeriodCalculationPV 1$60 x 1/(1.015) =$ $60 x 1/(1.025)^2 =$ $60 x 1/(1.0325)^3 =$ $60 x 1/( )^4 =$ $60 x 1/( )^5 =$ $1060 x 1/(1.04)^6 =$ Price =$1,146.11

YTM and Profits Bought Bond for $1, Sold for $1, Profit of $41.30

CUSIP ID IDTYPEPeriod CUSIPInterest1 CUSIPInterest2 CUSIPInterest3 CUSIPInterest4 CUSIPInterest5 CUSIPInterest6 CUSIPPrincipal6

TIPS – Treasury Inflation Protected Security

TIPS Ex: 6yr annual bond at 6%; Principal = $1000 PeriodPMTInflation RateAdj. Principal 1$ %$1005 2$ %$ $62.983%$ $ %$ $ %$ $ %$

References Treasury Strips: rips.xml rips.xml New York Fed: FINRA org: esting/typesofbonds/P esting/typesofbonds/P More on STRIPS: dictionary/bonds/separate-trading-registered-interest-and-principal- securities-strips-905http:// dictionary/bonds/separate-trading-registered-interest-and-principal- securities-strips-905 TIPS Example: id=253 id=253

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