Certificate Of Accrual On Treasury Security (CATS)

What Is Certificate of Accrual on Treasury Security (CATS)

Certificates of Accrual on Treasury Securities (CATS) were a type of bond invented by the bank Salomon Brothers. Issued by private banks from 1982-1986, these bonds were backed by the U.S. Treasury through the creation of special purpose entities (SPV/SPEs). 

CATS were one of the families of securities being issued at the time with feline acronyms. Other "felines” included Treasury Income Growth Receipts (TIGRs) and Lehman Investment Opportunity Notes (LIONs). TIGRs was the first of the family and were the creation of Merrill Lynch. Salomon Brothers followed their lead by creating their brand of zero-coupon bonds.

Understanding Certificate of Accrual on Treasury Security (CATS)

CATS were sold at significant discounts from their face value but could be redeemed for their full face value when they matured. Unlike other types of bonds, CATS did not pay any interest through coupons before the bond’s maturity. The difference between the amount the investor paid for the bond and its actual face value was meant to represent the interest that would have accrued in the years before the bond’s maturity.

Like other securities backed by the U.S. government, CATS were considered secure investments which did not come with any risk. They were guaranteed to redeem at their full face value at maturity. However, these bonds became obsolete when the U.S. government began directly issuing zero-coupon bonds through the Separate Trading of Registered Interest and Principal of Securities (STRIPS) program. They are no longer available for purchase, except through the secondary bond market.

Redemption of CATS

In 1991, Salomon Brothers, the first issuing bank for CATS, was engulfed in a scandal due to fraudulent activities. This scandal resulted in Salomon Brothers’ board appointing Warren Buffett to the role of chair and chief executive to restore integrity and stability to the bank. Eventually, the bank merged with Travelers Group in 1997, and later with Citibank, forming today’s Citigroup.

Due to conglomeration and bank mergers over time, many people holding CATS bonds now have a difficult time figuring out how to redeem them. The fastest way is to discern the bond’s Committee on Uniform Securities Identification Procedures (CUSIP) number. This number is a unique code that identifies the bond’s issuer. Once the bondholder has identified the issuer, they should be able to determine the entity currently responsible for the repayment of the bond.