Treasury Receipt

What Is a Treasury Receipt?

A treasury receipt is a type of bond that is purchased at a discount by the investor in return for a payment of its full face value at its date of maturity. It is a type of a zero-coupon bond, meaning there are no regular payments of interest. Other types of bonds pay interest in installments.

Treasury receipts are created by brokerage firms but are collateralized by underlying U.S. government securities. The U.S. Treasury also issues zero-coupon bonds.

Understanding the Treasury Receipt

Any bond is an investment in debt. Bonds are issued by companies or governments in order to raise money for short-term or long-term projects. In return, the investor is paid a profit, usually in the form of regular interest payments for the life of the bond.

For the individual investor, the best-known type of bond pays interest at regular intervals until the bond reaches its maturity date and the principal investment is returned. Such bonds are a common investment for retirees seeking a supplement to their regular income.

Treasury receipts are a bit different. Brokerages buy large blocks of U.S. Treasury bonds and then split them into their separate components, the principal payments and the interest payments. The brokerages sell the principal payments at a discount to investors, who reap the full value at the maturity date. They sell the interest payments to other investors.

In effect, treasury receipts are no longer U.S. Treasury bonds but they are backed by U.S. Treasury bonds.

Special Considerations

In the bond market, treasury receipts are known as zero-coupon bonds. The prices of zero-coupon bonds, in general, fluctuate wildly as changes in overall interest rates make them more or less desirable to traders.

Typically, they are sold at a deep discount because they mature at "par" or face value.

The U.S. Treasury Department has been issuing zero-coupon bonds since 1986.

A variety of Treasury receipts have been issued, including Separate Trading of Registered Interest and Principal Securities (STRIPS), Certificates of Accrual on Treasury Securities (CATS), Treasury Investment Growth Receipts (TIGRs), and Certificate of Government Receipts (COUGRs).

In 1986, the Treasury Department began issuing its own zero-coupon bonds, making most of these fancy acronyms obsolete.

How It Works

Essentially, the treasury security is based on a receipt. When a brokerage or any individual purchases a Treasury security, the U.S. Treasury records the ownership of the security in its system.

The brokerage is not given a bond certificate as confirmation of its purchase but instead is issued a receipt for the transaction. The brokerage then splits the bond into an interest payment and a principal payment, and both newly-minted securities contain information based on that receipt.