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Subject:  Re: More STRIPs and TINTs Date:  10/4/2012  5:06 PM
Author:  trader2012 Number:  34451 of 35367

If you set it up as a mortgage, where each payment reduces principal until payment no 40 takes it to zero, the yield on payment no 21 (the median payment) is 2.90%.

Paul,

However, if a would-be buyer of TINTs does the math as it should be done, then the CAGR is merely 1.28%. I could be wrong, of course. But allow me to work through another example, and let’s make the same, counter-factual assumption that we can trade for free.

E*Trade is offering 20-year Treasury derivatives at 57.155, the prin STRIPS of 08/15/32. Let’s make settlement T-1. Thus, the holding-period would be 19.86 years. ET says the YTM would be 2.879%. Excel’s YIELD function returns 2.84%. So the numbers are ballpark enough. If TINTs of comparable maturity are priced as ‘PAR minus the STRIP price’, then a TINT due in 08/15/32 would be priced at 42.845. The question now becomes, “What does the buyer get for that $428.45? According to your example, he/she would get 39.72 payments of approximately $14.30, or a total of approximately $567.85.

Do the math. The would-be buyer pays $428.45 to receive $567.85 prorated over a 19.86-year holding-period, or a very underwhelming, nominal CARG of 1.43% and a very serious loss of purchasing-power once taxes are paid and inflation is subtracted. If an investor wants to screw around with STRIPs, TINTs, and zeros, then at least they should be buying them when they are attractively priced, and they should be calculating their yields correctly, as this representative sample of my own holdings suggests.

Issue CPN Due Traded Price CAGR

FICO 0.000 08/08/16 05/08/06 53.160 6.36%
Cabco 0.000 10/01/30 07/11/08 23.112 6.81%
TVA 0.000 11/01/25 07/01/09 41.914 5.47%
FNMA 0.000 10/09/19 12/21/09 55.587 6.17%
Merrill 0.000 09/25/18 12/29/09 61.795 5.66%
Israel 0.000 02/15/24 01/06/10 48.976 5.19%
Intl Bk 0.000 05/01/30 03/31/10 33.284 5.63%

Where CAGR = (PAR/price)^ (1/Holding-period) -1, which would then also have to be discounted for taxes and inflation to estimate what the effective-yield would really be (aka, money that is spendable at the grocery store and not accounting tricks based on a return of principal that should never have been surrendered in the first place).

Why buy zeros? Because they can be a good example of Buy & Hold, "park 'em and forget 'em" investments when they are of decent-quality and attractively-priced, which certainly isn't now, nor is it likely to become so for another decade. The supply of acceptably-priced zeros (and their derivative cousins) dried up months ago.

Charlie
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