Treasury Receipt - Explained
What is a Treasury Receipt?
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What is a Treasury Receipt?
A treasury receipt is a bond which doesn't pay interest at intervals between the issuance date and the maturity date. A treasury receipt is issued at a discount to its face value but pays no interest. Profit is made when the debt reaches its maturity, where the actual face value is paid back to the investor.
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How Does a Treasury Receipt Work?
If a bond costs $75,000, then it must be awarded at less than that amount to an investor (maybe 15% off). Upon reaching the maturity date, the government will reclaim this bond at a price of $75,000, thus giving the investor a 15% profit. Treasury receipts are usually sold by a brokerage acting as a middle man, and they offer a receipt to the purchaser of these securities. A Little More on What is a Treasury Receipt Borrowers issue bonds in order to raise capital to finance spending. Investors who purchase these bonds are compensated by interests which are paid every six months by the borrowers until the maturity date. The principal interest is later paid at the maturity date. However, some companies separate bonds interest from their principal capital and sell these separate parts to maximize profits. Zero-coupon bonds do not attract interest or coupon payments before their maturity date. Treasury bonds are zero-coupon bonds that are issued by brokerage firms, and they are usually sold at a discount (most times more than 20% off). Investors rarely invest in treasury receipts due to price instability. Whenever a Treasury security is purchased by a brokerage, the US Treasury registers this brokerages ownership in its system. Treasury receipts are as a result of the separation of coupon payments from the principal of a bond. These coupon payments and the principal are then joined together and paid to the investor when the receipt matures as permitted by the 1986 Tax Act. The Treasury Department can also issue a zero-coupon bond if necessary. Let us assume that a firm is issued a bond for 20 years with the normal par face value of $1000 and a 10% coupon. Now, since coupons are issued every six months till the maturity date, well get 2x20= 40 coupon payments before the bond gets matured and repaid. Now, the brokerage firm will get $50 in each coupon payment for the next 20 years or 40 periods. If this coupon payment is stripped from the principal bond and sold as a separate bond, then we can say that this new bond (the coupon payment) is a treasury receipt. Thus, this firm will sell 41 separate bonds (40 coupon payments plus one principal bond) all within the maturity date (i.e., each bond sold by this firm must have a maturity date of less than 20 years).