Treasury Investors Growth Receipts, commonly known as TIGERs (or TIGRs), are a form of zero-coupon securities. These are U.S. government-backed bonds that have been stripped of their coupons. Unlike traditional bonds that provide periodic interest payments, the principal (referred to as the corpus) and individual coupons of TIGERs are sold separately at a significant discount from their face values. Upon maturity, investors receive the full face value of the TIGERs but do not get periodic interest payments.
Structure and Characteristics of TIGERs
Zero-Coupon Feature
TIGERs are defined by their zero-coupon nature. This means they are sold at a deep discount relative to their face value and do not offer periodic interest payments during their lifetime. Upon maturity, the investor receives the face value, compensating for the absence of periodic interest with an overall larger lump sum.
Discounted Purchase
These securities are bought at prices much lower than their maturity value. For instance, a TIGER with a face value of $1,000 might be purchased for $700. The difference between the purchase price and the face value represents the interest income, accruing over the life of the bond.
Where:
- \( P \) is the purchase price of the bond
- \( F \) is the face (maturity) value
- \( r \) is the annual interest rate
- \( n \) is the number of compounding periods per year
- \( t \) is the number of years until maturity
Investing in TIGERs
Investors interested in TIGERs are typically seeking a long-term investment with a guaranteed return at maturity. These securities are ideal for individuals who prefer a lump sum payment rather than regular income.
Example
Consider an investor purchasing a TIGER with a face value of $10,000 at a price of $6,500. Over a period (say 10 years), the investor will receive the face value of $10,000, realizing a profit of $3,500.
Historical Context
TIGERs were first introduced in 1982 by Merrill Lynch to make Treasury securities more accessible to a broad range of investors. By stripping the bond’s coupons, Merrill Lynch could sell parts of the Treasury securities separately, catering to different types of investors’ needs.
Comparison to Other Zero-Coupon Bonds
STRIPS
The U.S. Treasury also offers STRIPS (Separate Trading of Registered Interest and Principal Securities), which serve a similar purpose as TIGERs. STRIPS are also zero-coupon bonds, differing primarily in their direct issuance by the U.S. Treasury, whereas TIGERs were initially facilitated by financial institutions.
Related Terms
- Coupon: The interest payment made to bondholders, typically on a semiannual basis. Not applicable to TIGERs.
- Corpus: The principal part of a bond that is repaid at maturity, separate from the periodic interest (coupon) payments.
FAQs
1. How do TIGERs differ from traditional Treasury bonds?
TIGERs do not offer periodic interest payments; instead, they are sold at a discount and redeemed at face value at maturity.
2. Are TIGERs a good investment?
TIGERs can be advantageous for long-term investors seeking a lump sum payment at maturity rather than periodic interest.
3. How are TIGERs taxed?
The imputed interest on TIGERs is subject to income tax annually, even though no periodic payments are received.
References
Summary
Treasury Investors Growth Receipts (TIGERs) provide a unique investment vehicle as zero-coupon, government-backed bonds. By eliminating periodic interest payments and selling the principal and coupons separately at a discount, TIGERs cater to investors focused on long-term gains. Understanding the intricate details of their structure, historical context, and comparison with similar products like STRIPS, offers a comprehensive view of their role in the financial landscape.
