Definition
A Certificate of Accrual on Treasury Securities (CATS) is a form of U.S. Treasury security introduced in the early 1980s. These are zero-coupon bonds, meaning they do not pay periodic interest. Instead, they are sold at a significant discount to their face value and accrue interest until maturity, where the investors receive the face value. The difference between the purchase price and the face value is the investor’s return, making them appealing to those interested in predictable, long-term returns.
Examples
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Investment in CATS:
- An investor purchases a CATS with a face value of $10,000 for $6,000. The bond will mature in 10 years, and the investor will receive the full $10,000 at that time. The $4,000 difference represents the interest earned over the period, compounded annually.
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Use in Portfolio Diversification:
- A risk-averse investor adds CATS to their portfolio to ensure a guaranteed return from a creditworthy issuer—the U.S. government—while balancing more volatile equity investments.
Frequently Asked Questions
Q1: How are CATS different from regular Treasury bonds?
A1: Unlike regular Treasury bonds which pay periodic interest (coupons), CATS are zero-coupon bonds that do not make periodic interest payments. Instead, they accrue interest until maturity and are sold at a discount to face value.
Q2: Who would benefit most from investing in CATS?
A2: Long-term, income-focused investors seeking reliable returns from a highly creditworthy source such as the U.S. Treasury without the need for periodic income payments would benefit most from CATS.
Q3: How are CATS priced?
A3: CATS are priced at a discount to their face value, reflecting the sum of future interest payments that the Treasury would have made if it were a coupon-bearing instrument.
Q4: Are CATS still issued today?
A4: No, CATS were discontinued as new issues in the 1980s. However, investors could still purchase them on the secondary market.
- Zero-Coupon Bond: A bond that does not pay periodic interest and is issued at a discount to its face value.
- Treasury Bond (T-Bond): A long-term, interest-bearing bond issued by the U.S. Treasury with maturities typically ranging from 10 to 30 years.
- Discount Bond: A bond sold for less than its face value.
- Deep Discount: Refers to bonds sold at a substantial discount to their face value.
Online Resources
Suggested Books for Further Studies
- The Bond Book by Annette Thau
- Fixed Income Securities: Tools for Today’s Markets by Bruce Tuckman and Angel Serrat
- Treasury Securities and Financial Instruments by Sam L. Saunders
- The Handbook of Fixed Income Securities by Frank J. Fabozzi
Fundamentals of Certificate of Accrual on Treasury Securities (CATS): Fixed Income Basics Quiz
### What makes CATS different from regular Treasury bonds?
- [ ] They pay higher interest.
- [ ] They have shorter maturities.
- [ ] They are issued by private companies.
- [x] They do not pay periodic interest.
> **Explanation:** Unlike regular Treasury bonds that pay periodic interest, CATS are zero-coupon bonds that do not make periodic interest payments.
### What type of investor would find CATS most appealing?
- [ ] Short-term traders
- [x] Long-term, income-focused investors
- [ ] Real estate developers
- [ ] Technology startups
> **Explanation:** Long-term income-focused investors seeking reliable returns from U.S. Treasury securities would find CATS appealing.
### How does the pricing of CATS work?
- [ ] At face value
- [ ] Above face value
- [x] At a discount to face value
- [ ] At par value
> **Explanation:** CATS are sold at a discount to their face value, representing future interest payments embedded in the bond.
### Were CATS issued continuously over the years?
- [ ] Yes, they are still issued today.
- [x] No, they were discontinued in the 1980s.
- [ ] Yes, they are reissued every six months.
- [ ] No, they were a temporary war-time measure.
> **Explanation:** CATS were discontinued as new issues in the 1980s, though they can still be bought on the secondary market.
### What financial purpose do both CATS and zero-coupon bonds serve?
- [ ] Encourages immediate cash flow
- [ ] Functions as municipal bonds
- [x] Provides a long-term investment vehicle at discounted upfront costs
- [ ] Diversifies equity investment exclusively
> **Explanation:** Both CATS and zero-coupon bonds provide long-term investment vehicles sold at discounted upfront costs.
### Why are CATS considered safe investments?
- [ ] They are issued by private banks.
- [ ] They guarantee high returns.
- [x] They are backed by the U.S. government.
- [ ] They have no risk associated with them.
> **Explanation:** CATS are considered safe because they are backed by the creditworthiness of the U.S. government.
### What happens to CATS at maturity?
- [x] Investors receive the face value of the bond.
- [ ] Investors receive periodic interest.
- [ ] Investors lose their initial investment.
- [ ] Investors receive double their invested amount.
> **Explanation:** At maturity, investors receive the face value of the bond, which includes the initial investment plus all accrued interest.
### How do taxes work on the interest earned with CATS?
- [ ] Taxes are paid monthly.
- [ ] There are no taxes on CATS.
- [x] Interest accrues and is taxed annually.
- [ ] Taxes are deferred until maturity.
> **Explanation:** Interest on zero-coupon bonds like CATS accrues and is taxed annually, even though payments are only received at maturity.
### What do investors seek when they choose to invest in CATS?
- [ ] Immediate cash flow
- [ ] Rapid short-term gains
- [x] Predictable, long-term returns
- [ ] High-risk investment opportunities
> **Explanation:** Investors looking for predictable, long-term returns are typically drawn to CATS.
### In what scenario can CATS be purchased today?
- [ ] From new issues by the U.S. Treasury
- [ ] From real estate markets
- [x] On the secondary market
- [ ] From local banks
> **Explanation:** Although CATS are no longer issued as new securities, they can still be purchased on the secondary market.
Thank you for exploring the detailed functionalities and benefits of Certificates of Accrual on Treasury Securities (CATS) through our comprehensive study guide and challenging quiz questions. Your foundational knowledge in fixed income investing is now stronger than ever!
