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@braia renata Good question. The graphic at 1:36 doesn't match what the narrator says. Not sure why there is an 11th c-strip coupon at the far right. The graphic at 2:30 is also problematic: I see no reason for the c-strip coupon at the far left at the zero-month position. The good news is that the graphic at 0:07 seems correct. On a stripped 5-year _U.S. Treasury Note_ , there are ten separate c-strip coupons in sequence that only pay interest, *and* one p-strip (zero-coupon) bond that only pays the principle at the maturity date.
What am I missing here. A regular Bond pays a coupon Bi annually at whatever the interest is. So whats the appeal in having a Zero Coupon, 10 of them at that? By zero, you mean , you get nothing right? Apart for your Principal at the end.
yes, zero coupon bonds are essential "primitive" instruments: because they do not pay coupons, they have no reinvestment risk. They are pure duration (interest rate) risk such that they are ideal in portfolio/hedging construction
Thanks for the video. I have read that "STRIPS are taxed by the IRS on their implict interest (movement toward par value), which for fully taxable investors, results in negative cash flows in the years prior to maturity"... and I don't get it. How is this implicit interest rate derived from the strip bonds?
Because they are bought at a discount to par. So each year the market value of the bond moves a little closer to the face value since there is less future interest to be earned. So that increased market value represents a taxable gain. If a T-note is paying 5% and has five years to maturity, the bond would be sold at a 25% (for simplicity) discount to par, or 750 for a 1000 face. After year one, there are only 4 years left to maturity, so the market value (in a vacuum) would now be 800 for the same 1000 face; and so on. So that “implicit rate” is the same 5% per year. So if my strip has moved up in value to 800 from 750 after year one, I have to pay taxes on the “implicit rate” of 5%, or $50. And, since i never actually received a cash payment of interest, the taxes i have to pay represent a negative cash flow. If you have any other questions, I will get back to you in 10 years. Good luck.
Much better job of explaining STRIPS than my Foundations for Financial Planning book and/or instructor! Thanks!!!
@ufgatorbait2001 I appreciate the nice feedback, cheers!
2:15 why did we create 10 different zero coupon bonds and not 11? I apologize if my question is banal.
Thank you for the great videos!
Hello! Thank you for watching! If you do not receive your answer here, you may find help by posting in our forum, where David and other members discuss these concepts every day. Just make sure to include the link to this video in your question for reference. www.bionicturtle.com/forum
10 interest payments 2x5 and 1 final principle payment, thus 11 in total
same question but i couldn't find the answer on the link above. Can anyone help me pls!
@braia renata
Good question.
The graphic at 1:36 doesn't match what the narrator says. Not sure why there is an 11th c-strip coupon at the far right. The graphic at 2:30 is also problematic: I see no reason for the c-strip coupon at the far left at the zero-month position.
The good news is that the graphic at 0:07 seems correct. On a stripped 5-year _U.S. Treasury Note_ , there are ten separate c-strip coupons in sequence that only pay interest, *and* one p-strip (zero-coupon) bond that only pays the principle at the maturity date.
Great video, very helpfull and easy to understand.
Thanks,
Great explainer, thank you!
What am I missing here.
A regular Bond pays a coupon Bi annually at whatever the interest is. So whats the appeal in having a Zero Coupon, 10 of them at that? By zero, you mean , you get nothing right? Apart for your Principal at the end.
yes, zero coupon bonds are essential "primitive" instruments: because they do not pay coupons, they have no reinvestment risk. They are pure duration (interest rate) risk such that they are ideal in portfolio/hedging construction
@@bionicturtle Thanks..👍
very good you explain it in very simple terms
Thanks for the video. I have read that "STRIPS are taxed by the IRS on their implict interest (movement toward par value), which for fully taxable investors, results in negative cash flows in the years prior to maturity"... and I don't get it. How is this implicit interest rate derived from the strip bonds?
Because they are bought at a discount to par. So each year the market value of the bond moves a little closer to the face value since there is less future interest to be earned. So that increased market value represents a taxable gain. If a T-note is paying 5% and has five years to maturity, the bond would be sold at a 25% (for simplicity) discount to par, or 750 for a 1000 face. After year one, there are only 4 years left to maturity, so the market value (in a vacuum) would now be 800 for the same 1000 face; and so on. So that “implicit rate” is the same 5% per year. So if my strip has moved up in value to 800 from 750 after year one, I have to pay taxes on the “implicit rate” of 5%, or $50. And, since i never actually received a cash payment of interest, the taxes i have to pay represent a negative cash flow. If you have any other questions, I will get back to you in 10 years. Good luck.
Are these outperformed my other products now in 2024'?
THANKS, GREAT OVERVIEW
Thanks..
man, you're like god but better