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STRIPS & TIPS. Josh McBee. STRIPS – Separate Trading of Registered Interest and Principles of Securities. PMT. Type. $60 $60 $60 $60 $ 60 $60 $1000. SOLD SOLD SOLD SOLD SOLD SOLD SOLD. Interest Interest Interest Interest Interest Interest Principal. - PowerPoint PPT Presentation
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STRIPS & TIPSJosh McBee
STRIPS – Separate Trading of Registered Interest and Principles of Securities
Bond
Interest Interest Interest Interest Interest Interest Principal
$60$60$60$60$60$60$1000
Type PMTSOLDSOLDSOLDSOLDSOLDSOLDSOLD
Separate and Sell Individually
Bond PricingEx: 3yr semi-annual bond at 12%; YTM = 8%
Bond Ex: 3yr semi-annual bond at 12%; YTM = 8%
Period Calculation PV
1 $60 x 1/(1.04) = $57.69
2 $60 x 1/(1.04)^2 = $55.47
3 $60 x 1/(1.04)^3 = $53.33
4 $60 x 1/(1.04)^4 = $51.28
5 $60 x 1/(1.04)^5 = $49.31
6 $1060 x 1/(1.04)^6 = $837.73
Price = $1,104.81
Stripped BondEx: 3yr semi-annual bond at 12%; YTM = 8%
Period Calculation PV
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%
Period Calculation PV
1 $60 x 1/(1.015) = $59.11
2 $60 x 1/(1.025)^2 = $57.11
3 $60 x 1/(1.0325)^3 = $54.51
4 $60 x 1/(1.03625)^4 = $52.04
5 $60 x 1/(1.03875)^5 = $49.61
6 $1060 x 1/(1.04)^6 = $837.73
Price = $1,146.11
YTM and Profits
• Bought Bond for $1,104.81• Sold for $1,146.11• Profit of $41.30
1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 60
2
4
6
8
10
YieldYTM
Period
Yie
ld %
CUSIP ID
ID TYPE PeriodCUSIP Interest 1
CUSIP Interest 2
CUSIP Interest 3
CUSIP Interest 4
CUSIP Interest 5
CUSIP Interest 6
CUSIP Principal 6
TIPS – Treasury Inflation Protected Security
TIPSEx: 6yr annual bond at 6%; Principal = $1000
Period PMT Inflation Rate Adj. Principal1 $60.30 0.5% $1005
2 $61.14 1.4% $1019.07
3 $62.98 3% $1049.64
4 $63.73 1.2% $1062.24
5 $63.93 0.3% $1065.43
6 $1141.78 1.1% $1077.15
0 2 4 6 8 10 12$1,000.00
$1,100.00
$1,200.00
$1,300.00
$1,400.00
$1,500.00
$1,600.00
$1,700.00
Adj. Principal @ 1%Adj. Principal @ 3%Adj. Principal @ 5%
Years
Adj
. Pri
ncip
al
References
• Treasury Strips: http://www.bondtrac.com/professional/information/education/TreasuryStrips.xml
• New York Fed: http://www.newyorkfed.org/aboutthefed/fedpoint/fed42.html• FINRA org:
http://www.finra.org/Investors/InvestmentChoices/Bonds/SmartBondInvesting/typesofbonds/P133240
• More on STRIPS: http://www.investinganswers.com/financial-dictionary/bonds/separate-trading-registered-interest-and-principal-securities-strips-905
• TIPS Example: http://www.investinginbonds.com/learnmore.asp?catid=9&subcatid=51&id=253
Questions
