DEFINITION of Treasury Receipt

A treasury receipt is a zero-coupon bond that does not pay interest at regular intervals between the date of issue and maturity, but instead accrues the interest and pays it with the principal at maturity. Treasury receipts are sold by an intermediary, such as a brokerage firm, that issues a receipt to the purchaser representing the underlying Treasury securities.

BREAKING DOWN Treasury Receipt

A bond is issued by borrowers to raise capital for short-term or long-term projects. To compensate investors and lenders for purchasing their bonds, issuers will make periodic interest payments to bondholders until the maturity date, at which point the principal investment is repaid. In some instances, some brokerages securitize the coupon payments by separating the interest portion of the bond from the principal portion, and selling the separated parts as independent securities.

A bond that is trading with no coupons or interest payments is referred to as a zero-coupon bond. Zero-coupon bonds issued by brokerage houses are called Treasury receipts. These non-interest-bearing securities are typically sold at a deep discount to face value and mature at par. The prices of Treasury receipts fluctuate wildly because changes in interest rates in the markets make them more or less desirable

Generally, the stripped bonds are issued based on receipts for Treasury securities. When a brokerage purchases a Treasury security, the U.S. Treasury records the ownership of the purchased securities in its system. The brokerage is not given a bond certificate as confirmation of its purchase, but is, instead, issued a receipt for the transaction. Based on information in the receipt, Treasury receipts are created when a brokerage house separates the coupon from the principal of a Treasury bond or certain mortgage-backed security bonds, and repackages them so that the principal and coupon were paid at maturity, a process that was permitted by the 1986 Tax Act. Now, the Treasury Department can issue its own zero-coupon bonds, making the brokerage receipts largely obsolete.

Assume a brokerage firm was issued a receipt for a 10-year Treasury bond with a $1,000 par value and 5% coupon. Since the bond makes semi-annual interest payments, the total number of periods for payment is 10 x 2 = 20. For each of the 20 periods, the bondholder receives 5%/2 x $1,000 = $25. The brokerage will strip the 20 coupons from the bond, separating the coupons from the principal. Each of the coupons and the principal will be sold separately as individual securities. In effect, it would sell 21 separate zero-coupon securities to investors, each with different maturities based on when the interest payments on the Treasury bond are due.

Since the early 1980s, there has been a variety of Treasury receipts issued, including STRIPS (Separate Trading of Registered Interest and Principal Securities), CATS (Certificates of Accrual on Treasury Securities), TIGRs (Treasury Investment Growth Receipts), and COUGRs (Certificate of Government Receipts).