Treasury Investment Growth Receipts (TIGRs): Mechanism, Popularity, and Post-Era Insights
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Summary:
Treasury investment growth receipts (TIGRs) were innovative financial instruments introduced by Merrill Lynch in the 1980s. This comprehensive guide delves into the intricacies of TIGRs, exploring their creation, mechanics, popularity during the 1980s, reasons for discontinuation, and their continued presence in the secondary bond market.
What are treasury investment growth receipts (TIGRs)?
Treasury investment growth receipts (TIGRs) were pioneering financial products devised by Merrill Lynch in the early 1980s. These instruments were essentially zero-coupon bonds, originating from U.S. Treasury bonds. The concept behind TIGRs involved separating the coupon payments from the principal, creating distinct securities. TIGRs offered investors a unique opportunity to purchase bonds at a discounted price and receive the full face value upon maturity, without the intermediary interest payments typically associated with traditional bonds.
How treasury investment growth receipts (TIGRs) worked
Merrill Lynch initiated the TIGRs mechanism in 1982 through the establishment of special purpose vehicles (SPVs). These SPVs were utilized to procure coupon-bearing Treasury securities. The process involved “stripping” these securities, resulting in the isolation of two components: a zero-coupon certificate and a set of coupon payments.
Unlike conventional bonds, TIGRs did not offer periodic interest payments. Instead, they were issued at a significant discount to their par value. The extent of this discount varied depending on factors such as the remaining time until maturity and prevailing interest rates.
Upon maturity, investors could redeem TIGRs at their full face value, effectively realizing the yield differential between the discounted purchase price and the redemption value. This pricing structure was influenced by bond maturity and market expectations regarding future interest rates.
The popularity and demise of TIGRs
TIGRs experienced a surge in popularity during the early 1980s, primarily due to the prevailing economic conditions characterized by declining interest rates. Investors were drawn to TIGRs and similar securities as they provided an avenue for capital appreciation without the obligation of periodic interest payments.
The discontinuation of TIGRs issuance stemmed from the U.S. government’s decision to introduce its own zero-coupon bonds. This development rendered TIGRs obsolete, leading to their gradual disappearance from the financial landscape.
Frequently asked questions
How can I invest in TIGRs today?
TIGRs are no longer issued, but they may still be available for purchase on the secondary bond market through brokerage platforms or bond exchanges.
What risks are associated with investing in TIGRs?
Investing in TIGRs carries market risk due to fluctuations in interest rates. Additionally, there is no income stream until maturity, and the introduction of government-issued zero-coupon bonds has made TIGRs obsolete.
What was the typical maturity period for TIGRs?
The maturity period for TIGRs varied, but they were commonly issued with terms ranging from one to thirty years.
Were TIGRs taxable?
Yes, TIGRs were subject to federal income tax, even though they did not provide periodic interest payments. Investors were required to report the imputed interest earned annually for tax purposes.
How did TIGRs differ from traditional bonds?
Unlike traditional bonds that pay periodic interest, TIGRs were zero-coupon bonds, meaning they did not provide regular interest payments. Instead, investors purchased TIGRs at a discounted price and received the full face value at maturity.
What role did Merrill Lynch play in the issuance of TIGRs?
Merrill Lynch acted as the primary issuer of TIGRs, facilitating their creation through the purchase and stripping of coupon-bearing Treasury securities.
Why did the U.S. government begin issuing its own zero-coupon bonds?
The U.S. government introduced its own zero-coupon bonds to provide investors with a direct avenue to invest in such instruments, eliminating the need for intermediary securities like TIGRs.
Are TIGRs still actively traded on the secondary bond market?
While TIGRs are no longer issued, they may still be traded on the secondary bond market, albeit with less liquidity compared to actively issued securities.
Key takeaways
- Treasury investment growth receipts (TIGRs) were innovative financial instruments introduced by Merrill Lynch in the 1980s, functioning as zero-coupon bonds derived from U.S. Treasury securities.
- TIGRs offered investors the opportunity for capital appreciation without the burden of periodic interest payments, as they were sold at a discounted price and redeemed at face value upon maturity.
- The discontinuation of TIGRs issuance occurred following the introduction of government-issued zero-coupon bonds, rendering TIGRs obsolete but leaving a lasting legacy in financial markets.
- While TIGRs are no longer issued, they may still be accessible through the secondary bond market, offering investors a glimpse into financial innovation of the past.
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