Hypothetical Situations • You worked for a company called Akiyoshi • President, Akiyoshi, did not pay you well • 55 Years • Own $300,000 by cash • Have a bad heart condition by working with Aki for a long time • No tolerance to Stress
Appropriate Place to Put Money? • SavingsAccount • Professer Brooks portfolio • My Pocket • Stock Market • Treasury Bill • Municipal Bond
Inflation and Rate of Return(ROR) • What is the real ROR with Inflation??
Go Back to Savings Account Is savings accounts really appropriate for your investment?
Risk of Investment • Variance of Market Price • Stock Price • Bond Price • Inflation Rate • Typically positive every year
No Risk Investment? • TIPS Treasury Inflation-Protected Securities • STRIPS • Separate Trading of Registered Interest and Principal of Securities
TIPS: How does this work? • Consumer Price Index(CPI) • Face Value • Coupon Rate
TIPS : Example • Excel Sheet
STRIPS • STRIPS are effectively zero coupon bonds • Separated in Coupon Strips and Principle Strips • Effectively zero coupon bonds? • Year to Maturity of STRIPS will be used to discount future cash flow
STRIPS • Can be purchased from Bank • Bank will use spot rate to price each of Zero coupon bounds, whose rate can be calculated by observed yields of Treasury bills and treasury Coupon securities
SPOT Rate Example • Purchased 1.5 years, semiannual coupon of 8.5% and $100 par bound • Observed YTM of .5 and I year are 8% and 8.3% respectively without no coupon. • Price of 1.5 Maturity bill is $99.45
Example • Excel
STRIPS : History • Originally started by • Merrill Lynch and Salomon Bros in 1982 • less liquid bounds and indirect obligation of US movement bounds • In 1985, US government announced STPRIPS program • All of 10 years and longer treasuries are qualified Caused To address those Problems
STRIPS : Quiz • Face $100,000 • Coupon rate 3% • YTM 4% • Annual Interstate Payment • Year to Maturity 10 • How many Zero Coupon bonds can be created ? • What would be the rough projected price of Zero Coupon bounds for year 2 interest rate Payment?
Questions ?? • Thank you for listening
Source • http://www.money-rates.com/savings.htm • Foundation of Finance Market and Institutions • http://www.youtube.com/watch?v=pvTCTl86rrg • http://www.investopedia.com/terms/t/treasurystrips.asp • http://www.newyorkfed.org/aboutthefed/fedpoint/fed42.html • http://www.wikinvest.com/wiki/Treasury_STRIPS