Treasury Investors Growth Receipt (TIGR/TIGER)

Treasury Investors Growth Receipt TIGER Zero Coupon Securities Government Bonds Investment
TIGERs (Treasury Investors Growth Receipts) are U.S. government-backed bonds stripped of their coupons and sold separately at a deep discount.
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Treasury Investors Growth Receipt (TIGR/TIGER)

Treasury Investors Growth Receipts, commonly known as TIGERs or TIGRs, are a type of zero-coupon security. These are U.S. government-backed bonds that have been stripped of their coupons. The [CORPUS] (principal amount) and the individual coupon payments of these bonds are sold separately at a deep discount from their face values. Investors receive the face value for the TIGRs when the bonds mature, but they do not receive periodic interest payments.

Examples

  1. Example 1: An investor buys a TIGER bond with a face value of $1,000 that matures in 10 years for $600. When the bond matures, the investor receives $1,000, pocketing a $400 gain as interest.
  2. Example 2: A pension fund manager buys $100,000 face value of TIGERs with 15 years to maturity for $55,000. At maturity, the fund receives the full $100,000, realizing $45,000 in income.

Frequently Asked Questions (FAQs)

Q1: What are the tax implications of investing in TIGERs? A: Investors in TIGERs are required to pay federal income tax on the imputed interest that accrues annually, despite not receiving periodic interest payments until maturity. This is known as “phantom income.”

Q2: Are TIGERs considered safe investments? A: TIGERs are backed by the U.S. government; therefore, they carry virtually no credit risk. However, like all fixed-income securities, they are subject to interest rate risk.

Q3: How are TIGERs different from traditional Treasury bonds? A: Unlike traditional Treasury bonds that offer periodic interest payments, TIGERs do not pay interest during the life of the bond. Instead, they are sold at a discount and pay the full face value at maturity.

  • Zero Coupon Bond: A bond that does not pay periodic interest (coupon) payments and is issued at a significant discount to its face value. The bondholder receives the face value at maturity.
  • STRIPS: Separate Trading of Registered Interest and Principal of Securities are Treasury securities that have been separated into their principal and interest components and sold as individual securities.

Online References

  1. U.S. Securities and Exchange Commission: Zero Coupon Bonds
  2. Investopedia: Zero-Coupon Bond

Suggested Books for Further Study

  1. “Investing in Bonds For Dummies” by Russell Wild
  2. “Fixed Income Securities: Tools for Today’s Markets” by Bruce Tuckman and Angel Serrat
  3. “Bond Markets, Analysis, and Strategies” by Frank J. Fabozzi

Fundamentals of Treasury Investors Growth Receipt: Finance Basics Quiz

### What is a primary feature of a TIGER bond? - [x] It does not offer periodic interest payments and is sold at a discount. - [ ] It pays interest annually but does not return the principal. - [ ] It offers biannual interest and is sold at face value. - [ ] It includes regular dividends similar to stocks. > **Explanation:** A primary feature of a TIGER bond is that it does not offer periodic interest payments; instead, it is sold at a deep discount and redeemed at face value at maturity. ### How do investors realize gains from TIGER bonds? - [ ] Through quarterly dividend payments. - [x] By the difference between the purchase price and the face value at maturity. - [ ] Through monthly interest payments. - [ ] Gains are realized through semi-annual coupon payments. > **Explanation:** Investors realize gains from TIGER bonds by the difference between the discounted purchase price and the full face value received at maturity. ### What kind of risk do TIGER bonds primarily carry? - [ ] Credit risk - [x] Interest rate risk - [ ] Currency risk - [ ] Liquidity risk > **Explanation:** TIGER bonds primarily carry interest rate risk, as the value of zero-coupon bonds is highly sensitive to changes in interest rates. ### Are TIGER bonds backed by the U.S. government? - [x] Yes, they are backed by the U.S. government. - [ ] No, they are issued by corporate entities. - [ ] Partially, they are backed by state governments. - [ ] No, they have no governmental backing. > **Explanation:** TIGER bonds are backed by the U.S. government, which adds a layer of security since they are virtually free from credit risk. ### What must investors of TIGERs report to the IRS each year? - [x] The imputed interest that accrues annually. - [ ] Only the face value gain at maturity. - [ ] Any capital gains annually. - [ ] They do not need to report anything until maturity. > **Explanation:** Investors must report the imputed interest that accrues each year despite no periodic payments, termed as "phantom income." ### Which entity is responsible for stripping the interest from the principal for Treasury securities? - [ ] The IRS - [ ] The Depart of Commerce - [x] Financial institutions in partnership with the U.S. Treasury - [ ] The Federal Reserve alone > **Explanation:** Financial institutions, in partnership with the U.S. Treasury, “strip” the interest and principal of Treasury securities to create and sell instruments like TIGERs. ### In what way do TIGERs provide tax treatments to different types of investors? - [ ] They avoid all types of federal tax. - [x] They are subject to federal income tax on the imputed interest accrued. - [ ] State tax is considered, not federal. - [ ] They get significant tax exemptions. > **Explanation:** TIGERs are subject to federal income tax on the imputed interest that accrues annually, creating tax liabilities even without cash flow. ### Who can purchase TIGERs in the secondary market? - [x] Individual investors and institutions - [ ] Only individual retail investors - [ ] Only institutional investors - [ ] Only accredited investors > **Explanation:** Both individual investors and institutions can purchase TIGERs in the secondary market, making them broadly accessible instruments. ### What affects the value of TIGERs over time? - [ ] Market demand for government bonds specifically - [x] Prevailing market interest rates - [ ] Local economic development - [ ] Domestic stock market performance > **Explanation:** The value of TIGERs is highly sensitive to prevailing market interest rates because they are zero-coupon bonds. ### Where can someone purchase TIGERs initially? - [ ] Directly from the Federal Government website - [ ] From the IRS - [x] Through financial institutions and brokers - [ ] Municipal government offices > **Explanation:** Investors can purchase TIGERs through financial institutions and brokers, where Treasury securities are stripped and sold separately.

Thank you for exploring the intricate details of Treasury Investors Growth Receipts (TIGERs) and tackling our engaging quiz questions to solidify your understanding of these investment instruments!

Wednesday, August 7, 2024
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