Definition
A Certificate of Accrual on Treasury Securities (CATS) is a form of U.S. Treasury security introduced in the early 1980s. These are zero-coupon bonds, meaning they do not pay periodic interest. Instead, they are sold at a significant discount to their face value and accrue interest until maturity, where the investors receive the face value. The difference between the purchase price and the face value is the investor’s return, making them appealing to those interested in predictable, long-term returns.
Examples
Investment in CATS:
- An investor purchases a CATS with a face value of $10,000 for $6,000. The bond will mature in 10 years, and the investor will receive the full $10,000 at that time. The $4,000 difference represents the interest earned over the period, compounded annually.
Use in Portfolio Diversification:
- A risk-averse investor adds CATS to their portfolio to ensure a guaranteed return from a creditworthy issuer—the U.S. government—while balancing more volatile equity investments.
Frequently Asked Questions
Q1: How are CATS different from regular Treasury bonds?
A1: Unlike regular Treasury bonds which pay periodic interest (coupons), CATS are zero-coupon bonds that do not make periodic interest payments. Instead, they accrue interest until maturity and are sold at a discount to face value.
Q2: Who would benefit most from investing in CATS?
A2: Long-term, income-focused investors seeking reliable returns from a highly creditworthy source such as the U.S. Treasury without the need for periodic income payments would benefit most from CATS.
Q3: How are CATS priced?
A3: CATS are priced at a discount to their face value, reflecting the sum of future interest payments that the Treasury would have made if it were a coupon-bearing instrument.
Q4: Are CATS still issued today?
A4: No, CATS were discontinued as new issues in the 1980s. However, investors could still purchase them on the secondary market.
Related Terms
- Zero-Coupon Bond: A bond that does not pay periodic interest and is issued at a discount to its face value.
- Treasury Bond (T-Bond): A long-term, interest-bearing bond issued by the U.S. Treasury with maturities typically ranging from 10 to 30 years.
- Discount Bond: A bond sold for less than its face value.
- Deep Discount: Refers to bonds sold at a substantial discount to their face value.
Online Resources
- U.S. Treasury Bonds Overview
- Understanding Zero-Coupon Bonds
- Financial Industry Regulatory Authority (FINRA)
Suggested Books for Further Studies
- The Bond Book by Annette Thau
- Fixed Income Securities: Tools for Today’s Markets by Bruce Tuckman and Angel Serrat
- Treasury Securities and Financial Instruments by Sam L. Saunders
- The Handbook of Fixed Income Securities by Frank J. Fabozzi
Fundamentals of Certificate of Accrual on Treasury Securities (CATS): Fixed Income Basics Quiz
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