What is a Treasury Investment Growth Receipts (TIGRs)

Treasury Investment Growth Receipts (TIGRs) were securities issued by investment firm Merrill Lynch that primarily functioned as synthetic zero-coupon U.S. Treasury bonds.

Treasury Investment Growth Receipts (TIGRs) were bonds and notes which were “stripped” of their coupons, so no interest payments were made. The bonds and notes, designed to be redeemed at maturity in one lump sum, sold at a deep discount to par value. The discount pricing structure had a basis on bond maturity and the current expectations of interest rates. TIGRs issued by Merrill Lynch would also trade on secondary markets. 

BREAKING DOWN Treasury Investment Growth Receipts (TIGRs)

Treasury Investment Growth Receipts (TIGRs) and similar securities became popular in the early 1980s because interest rates were falling from historically high levels seen in the late 1970s. As interest rates fell, bond and note values rose, especially those with longer maturities and fewer coupons. The highest demand was for the zero coupon securities.

In 1982 Merrill Lynch created special purpose entities (SPE) who would buy coupon-bearing Treasury securities. These large investors would “strip” the coupons from the vehicle creating two separate securities. One bond is the equivalent of a zero-coupon certificate, and the other is a set of coupons which might be attractive to other investors.

In 1986, however, Merrill Lynch discontinued TIGRs because the U.S. Treasury began issuing its own zero-coupon bonds called Separate Trading of Registered Interest and Principal of Securities (STRIPS) ().

Impact of Falling Interest Rates on TIGRs

The demand for zero-coupon bonds and notes such as TIGRs, and other similarly structured securities, grew in the climate of falling interest rates. No interest is paid on a zero-coupon bond. It trades at a steep discount to face value, but redemption at maturity is at full face value. That discount fluctuates depending on how much time there is left until maturity and prevailing interest rates.

For example, consider a 30-year bond with a face value of $1,000, issued at a rate of five-percent paid annually. The security would have 30 coupons, each redeemable in successive years for $50 each. At an annual interest rate expectation of five-percent, the bond's redemption of $1,000 would cost about $232 when issued. After 30 years, the redemption of the bond itself is for $1,000.

Such a bond would be worth less stripped of those annual coupons payable over the term of the bond. Its worth would depend entirely on the present value (PV) of the $1,000 face value in 30 years, with its market price based on prevailing interest rate expectations. Suppose the interest rate fell to three percent in the next year. Now, the bond with 29 years to maturity would be worth about $412.

In addition to TIGRs, other firms offered similar securities, known as “felines” because of their acronyms. These included Certificates of Accrual on Treasury Securities (CATS) issued by Salomon Brothers and Lehman Investment Opportunity Notes (LIONs) created by Lehman Brothers. All of these types of securities became obsolete when the U.S. Treasury began offering STRIPS in 1986.