Certificate of Accrual on Treasury Securities (CATS)

Definition

Certificate of Accrual on Treasury Securities (CATS) are U.S. Treasury securities sold at a significant discount from their face value. Unlike traditional bonds that pay periodic interest, CATS are zero-coupon securities, meaning they do not make any interest payments during their lifetime but are sold at a deep discount and redeemed at face value upon maturity. This feature makes them suitable for long-term financial goals such as retirement or education planning. Furthermore, as Treasury securities, CATS are non-callable, ensuring that the issuer cannot redeem them before their maturity date.

Examples

Retirement Planning:
- An individual purchases a CATS with a face value of $10,000 at a discounted price of $6,000 with a 20-year maturity period. Upon maturity, the individual receives $10,000, capitalizing on the investment growth to fund retirement.
Education Planning:
- Parents invest in CATS to fund their child’s college education. They buy the bond at $5,000 with a face value of $8,000 maturing in 15 years, ensuring funds are available when tuition payments are due without interim interest income.

Frequently Asked Questions (FAQ)

What are CATS used for?

CATS are primarily used for long-term investment planning, such as retirement and education funding, due to their lump-sum payout at maturity.

How do CATS differ from regular bonds?

Unlike regular bonds that make periodic interest payments, CATS are zero-coupon bonds sold at a discount and redeemable at face value upon maturity.

Can CATS be called before maturity?

No, as Treasury securities, CATS cannot be called before their maturity date, ensuring that investors receive the full face value at maturity.

Are CATS safe investments?

Yes, as U.S. Treasury securities, CATS are considered very safe investments with minimal default risk.

How is the interest earned on CATS taxed?

Although CATS do not pay periodic interest, the imputed interest accrued each year is subject to federal income tax.

Zero-Coupon Bond: A bond sold at a discount that does not make periodic interest payments but is redeemed at face value upon maturity.
Face Value (Par Value): The amount paid to the bondholder at maturity.
Maturity Date: The date on which a bond’s principal amount is paid to investors.
Discount: The difference between the face value of a bond and its purchase price when it is sold below face value.
U.S. Treasury Securities: Debt instruments issued by the U.S. Department of the Treasury considered low-risk investments.

Online References

Suggested Books for Further Studies

“The Bond Book: Everything Investors Need to Know About Treasuries, Municipals, GNMAs, Corporates, Zeros, Bond Funds, Money Market Funds, and More” by Annette Thau
“The Intelligent Investor: The Definitive Book on Value Investing” by Benjamin Graham
“Bonds: The Unbeaten Path to Secure Investment Growth” by Hildy Richelson and Stan Richelson

Fundamentals of Certificate of Accrual on Treasury Securities (CATS): Investment Basics Quiz

### What is a primary feature of CATS? - [ ] They pay annual interest. - [x] They are zero-coupon securities. - [ ] They can be called before maturity. - [ ] They offer high-risk returns. > **Explanation:** CATS are zero-coupon securities, meaning they do not pay annual interest but are sold at a discount and redeemed at face value at maturity. ### When is the full face value of a CATS received? - [ ] Quarterly - [ ] Annually - [ ] Semi-annually - [x] At maturity > **Explanation:** The full face value of a CATS is received at maturity, not at periodic intervals. ### Why are CATS ideal for retirement planning? - [ ] They provide regular income. - [x] They offer lump-sum payments at maturity. - [ ] They are callable before maturity. - [ ] They have fluctuating interest rates. > **Explanation:** CATS are ideal for retirement planning because they provide lump-sum payments at maturity. ### Can CATS be called before their maturity? - [ ] Yes - [x] No - [ ] Only in certain conditions - [ ] It depends on the issuer > **Explanation:** CATS cannot be called before their maturity, providing a secure investment option through to the maturity date. ### Which type of bond is similar to CATS? - [ ] Convertible bond - [ ] Municipal bond - [x] Zero-coupon bond - [ ] Floating-rate bond > **Explanation:** CATS are similar to zero-coupon bonds as both do not pay periodic interest and are redeemed at their face value upon maturity. ### What entity issues CATS? - [ ] Private corporations - [ ] Local governments - [x] U.S. Treasury - [ ] International banks > **Explanation:** CATS are issued by the U.S. Treasury, making them a reliable investment. ### What tax implication do investors of CATS face annually? - [x] Imputed interest is taxable each year. - [ ] Principal amount is taxed at purchase. - [ ] They are tax-exempt. - [ ] Taxes are deferred until maturity. > **Explanation:** Imputed interest on CATS is taxable each year, even though no actual interest is received annually. ### What is a benefit of CATS for education planning? - [x] Guaranteed lump-sum payout at maturity - [ ] Monthly income during investment period - [ ] Variable interest payments - [ ] Early access to funds > **Explanation:** A key benefit of CATS for education planning is the guaranteed lump-sum payout at maturity, ensuring funds are available for tuition. ### What does purchasing CATS at a discount mean? - [ ] Buying above face value - [x] Buying below face value - [ ] Buying at face value - [ ] Buying at variable price > **Explanation:** Purchasing CATS at a discount means buying the bond below its face value. ### Who should consider investing in CATS? - [ ] Short-term speculators - [x] Long-term planners like those saving for retirement or education - [ ] Day traders - [ ] Risk-averse investors > **Explanation:** Investors with long-term plans, such as saving for retirement or education, should consider investing in CATS due to their secure, lump-sum payout structure.

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