Akiyoshi Saito

Hypothetical Situations

• You worked for a company called Akiyoshi– President, Akiyoshi, did not pay you well

• 55 Years• Own $300,000 by cash• Have a bad heart condition by working

with Aki for a long time– No tolerance to Stress

Appropriate Place to Put Money?

• Savings Account• Professer Brooks portfolio• My Pocket • Stock Market• Treasury Bill• Municipal Bond

Typical Return of Investment

My Pocket

-100%

Municipal Bond

5.5%

Savings Account

1.04%

Treasury Bound

4.0%

Stock Market

11.1%

Inflation and Rate of Return(ROR)

• What is the real ROR with Inflation??

ROR

Inflation

Inflation and Real ROR

ROR Inflation Real ROR

Go Back to Savings Account

ROI

1.04%

Inflation

3%

Real ROR

-1.96%

IS SAVINGS ACCOUNTS REALLY APPROPRIATE FOR YOUR INVESTMENT?

ROR of Investment

My Pocket

-100%

Municipal Bond

2.5%

Savings Account

-1.96%

Treasury Bond

1.0%

Stock Market

8.1%

Risk of Investment

• Variance of Market Price– Stock Price– Bond Price

• Inflation Rate– Typically positive every year

No Risk Investment?

• TIPS

Treasury Inflation-Protected Securities

• STRIPS– Separate Trading of Registered Interest

and Principal of Securities

TIPS: How does this work?

• Consumer Price Index(CPI)• Face Value• Coupon Rate

TIPS

CPI

•CPI

•Increase

Face

•Face Value

•Increase Increase in Tax Expense

ROR

•Fixed

•No Risk of Inflation

TIPS : Example

• Excel Sheet

STRIPS

• STRIPS are effectively zero coupon bonds– Separated in Coupon Strips and Principle Strips

• Effectively zero coupon bonds?• Year to Maturity of STRIPS

will be used to discount future cash flow

STRIPS

• Can be purchased from Bank• Bank will use spot rate to price each of

Zero coupon bounds, whose rate can be calculated by observed yields of Treasury bills and treasury Coupon securities

SPOT Rate Example

• Purchased 1.5 years, semiannual coupon of 8.5% and $100 par bound

• Observed YTM of .5 and I year are 8% and 8.3% respectively without no coupon.

• Price of 1.5 Maturity bill is $99.45

STRIPS

http://www.google.com/search?q=treasury+strips&oe=utf-8&rls=org

Example

• Excel

STRIPS : History

• Originally started by – Merrill Lynch and Salomon Bros in 1982– less liquid bounds and indirect obligation of

US movement bounds

• In 1985, US government announced STPRIPS program– All of 10 years and longer treasuries are

qualified

Caused

To address those Problems

STRIPS : Quiz

• Face $100,000• Coupon rate 3%• YTM 4%• Annual Interstate Payment• Year to Maturity 10

• How many Zero Coupon bonds can be created ?

• What would be the rough projected price of Zero Coupon bounds for year 2 interest rate Payment?

Questions ??

• Thank you for listening

Source

• http://www.money-rates.com/savings.htm• Foundation of Finance Market and Institutions• http://www.youtube.com/watch?v=pvTCTl86rrg• http://www.investopedia.com/terms/t/treasurystri

ps.asp• http://www.newyorkfed.org/aboutthefed/fedpoint/

fed42.html• http://www.wikinvest.com/wiki/Treasury_STRIPS