What Is a Certificate of Government Receipts (COUGR)?
A Certificate of Government Receipts (COUGR) is a U.S. Treasury bond that is stripped of its coupon payments. The coupon portion of a Treasury is held by an intermediary dealer, such as a bank, while COUGRs only pay an investor the face value at maturity. Even without the coupon payments, COUGRs are still attractive to investors because the bond is sold at a discount to face value.
- A Certificate of Government Receipts (COUGR) is a U.S. Treasury bond that is stripped of its coupon payments and only pays an investor the face value at maturity.
- The coupon portion of the bond is stripped and held by an intermediary institution and only the principal portion is sold to an investor.
- Even without the coupon payment, COUGRs are attractive to investors because they are sold at a discount to face value. An investor's return is the difference between the face value and the discount price.
- Other "stripped" bonds have existed over time, including Certificates of Accrual on Treasury Securities (CATS), Treasury Income Growth Receipts (TIGRs), and Lehman Investment Opportunity Notes (LIONs).
Understanding a Certificate of Government Receipts (COUGR)
A Certificate of Government Receipts represents one of several varieties of stripped U.S. Treasury securities. Normally, when an investor buys a U.S. Treasury bond, they expect to receive regular, semi-annual coupon payments at a fixed interest rate until maturity, at which point the bond pays back its principal.
An investment firm produces a stripped bond by purchasing a normal bond and then accounting separately for its principal and interest cash flow components. The institution then sells the principal part of the bond without the coupon.
In other words, when an investor purchases a stripped bond they do so expecting only to receive the face value of the bond at maturity. To make the transaction attractive to investors, the institutions that sell stripped bonds do so at a discount to the face value of the bond.
The investor’s return consists solely of the difference between the face value of the bond at maturity and the discounted price the investor pays at purchase.
The Family of Stripped Bonds
Between roughly 1982 and 1986, various investment firms offered their own flavor of stripped Treasury bonds. BNP Paribas offered COUGRs as a synthetic investment. Other options available in the mid-1980s included Certificates of Accrual on Treasury Securities (CATS), sold by Salomon Brothers, Treasury Income Growth Receipts (TIGRs), sold by Merrill Lynch, and Lehman Investment Opportunity Notes (LIONs), sold by Lehman Brothers.
The acronyms for stripped securities (CATS, TIGRs, LIONs) earned them the nickname of the feline family of securities.
The U.S. Treasury introduced Separate Trading of Registered Interest and Principal of Securities (STRIPS) in 1985, allowing the sale of the principal and coupon components of Treasury bonds as a government security.
STRIPS behave exactly as other stripped bonds behave and by removing the financial institution from the stripping equation, STRIPS effectively killed the market for new issues of such securities from banks. Interested investors may still be able to find COUGRs, TIGRs, and CATS on secondary bond markets, however.
Stripped Bonds vs. Zero-Coupon Bonds
Stripped bonds share similarities with zero-coupon bonds. From the investor’s standpoint, both offer an issuance at an attractive discount to face value and pay face value at maturity. From the issuer’s standpoint, however, the two varieties act differently.
Stripped bonds derive from an interest-bearing bond, whereas zero-coupon bonds simply offer the difference between discounted and face value in lieu of coupon payments. Coupon payments for stripped bonds still exist decoupled from the bond’s principal. In most cases, this allows bond traders to sell each coupon payment as a standalone zero-coupon bond.
Can I Buy STRIPS Directly From the U.S. Treasury?
No. Investors cannot buy STRIPS directly from the U.S. Treasury. The only way investors can gain access to STRIPS is through financial institutions and government securities brokers and dealers that sell them.
How Often Do STRIPS Pay Interest?
The intervals in which STRIPS pay interest depends on the maturity of a bond. For example, a U.S. Treasury note that matures in 10 years will pay 20 interest payments; one payment every six months over a 10-year time frame.
What Is the Benefit of Purchasing STRIPS?
STRIPS are good for investors who prefer to know the exact value of money being received at a specific point in time. STRIPS will always have a specific maturity date and will pay out their face value. The investor will know the amount they will receive as a return as it will be the difference between the face value of the bond and the discount price they paid for it. During the time till maturity, an investor will have a negative cash flow, but the returns at maturity may be better than traditional bonds.