Help me decipher the utility of a "CATS" bond.

April 11, 2006 8:53 PM

My grandmother recently passed away and in her possession we discovered a matured "CATS" (Certificate of Accrual on Treasury Securities) "Series P" bond to be paid to my name. It's nothing huge, a few thousand dollars, but it matured in 2002. Though I'm fairly sure I've figured out how to redeem it, I'm having absolutely no success in understanding exactly what a "CATS" bond is. Plenty of Google results but it's all Greek to me, quite frankly.

It's for $6,000, was issued in September of 1985, matured in 2002, and says "13 1/4% Interest due May 15, 2014" at the top.

The institution here in Manhattan where it was issued is inaccessible (apparently the goddamned World Trade Center fell on top of it) so it's not as simple as just going to the bank. Here's what I'm wondering--It matured in 2002, meaning I can redeem its $6,000 worth, correct?

Well, what's this 13.25% figure all about? Is that a yearly accrued interest until 2014, making the bond worth quite a lot more than its purchase price? Or does it mean that in 2014, the bond is going to accrue a flat 13.25% (topping out at just under $6,800)?

Obviously if it's going to be worth quite a lot in 2014 I'll sit on it, but $6000 today is worth a lot more to me than $6800 in the better part of a decade, so help me make the decision to redeem it or not. Thanks for any help anyone can give me--I'd be lost without you.

posted by incomple to work & money (21 answers total)

CATS: How are you gentlemen?

CATS: All your base are belong to us.

CATS: You have no chance to accrue interest; make your time.
posted by ikkyu2 at 9:07 PM on April 11, 2006

CATS are zero-coupon Treasury bonds. See this column (at the bottom).
posted by milkrate at 9:08 PM on April 11, 2006

From what I know, a CATS bond is a bond that is sold at a discount and the profit is made upon redemption at the maturity value. In your case, I presume your grandmother would have bought the bond for some amount less than $6,000 in 1985 in anticipation of receiving $6k in 2002. CATS bonds do not pay interest. Which is why I'm confused at the 2014 bit at the top, as you say. I've never seen one, and haven't thought about them in a while, so I may be wrong. I'll poke around and see if I can find more details.
posted by loquax at 9:15 PM on April 11, 2006

Okay, perhaps I need to make my profound ignorance more clear: I've read all of these links already (minus that column) and none of it still makes any sense to me. I know nothing of bonds, financial terminology, any of it. "Zero-coupon?" Shit man, I got zero context for how any this works.

Here's how I THINK it works. Tell me if I'm right...

1. In 1985 my gran bought this bond for some small amount, knowing that in 2002 it could be redeemed for $6,000.

2. In 2014, it will accrue an additional 13.25% interest.

3. If I attempt to redeem it now it will be worth $6,000, plus maybe a fraction of the additional $790 it will earn in eight years.

Eh? Eh? If I'm right, let me know. If I'm wrong, the only way for me to "get it" will be to have this explained to me as if I'm a retarded puppy. Illustrations, charts, et cetera may not be necessary but will certainly be helpful.
posted by incomple at 9:20 PM on April 11, 2006

Upon reflection I see that my comment sounds a little snarky. Here's my gratitude, user for user.

ikkyu2, though none of that makes sense, I get the AYB joke and thus I appreciate the comment all the same.

milkrate, thank you for showing me something new. that nose-y housewife's predicament is now mine.

loquax, thank you for explaining it in plain English, and prodding me a bit more towards redeeming it immediately. I want money. I want it now.
posted by incomple at 9:24 PM on April 11, 2006

Sorry, it wasn't clear what you were referring to.

Because these are interest-bearing instruments, they have tax consequences. The 13.25% is used to calculate this. Thinking dimly back to mom's old tax returns, I believe that in 1985 the amortization used to calculate this capital-gains tax liability took place over 29 3/4 years, for some arcane and unknown reason.

Since yours is matured, there are no more tax issues, and it's not getting any more valuable. Go redeem it for its face value.
posted by ikkyu2 at 9:27 PM on April 11, 2006

Er, I mean, there are no more tax issues involved in holding it anymore. It will of course be reported by the redeeming instutition on a 1099; and because it's in your name, not Grandma's, it'll be taxable income, not inheritance.
posted by ikkyu2 at 9:29 PM on April 11, 2006

What you say??

The first paragraph, again, is Greek (Amortization? Capital-gains tax liability? Arcane?) but the second is exactly what I wanted to hear--An endorsement of my immature desire to redeem this mother immediately.

Though I'm willing and eager to listen to any contrary opinions, thank you ikkyu2.
posted by incomple at 9:31 PM on April 11, 2006

ikkyu2's links to the bonds online site explain CATS pretty well. Basically, Treasury bonds are very expensive, so in the '80's third parties starting selling them in smaller chunks for smaller investors, minus the interest bearing "coupons". Therefore an investor buying CATS would be buying a "share" of a Treasury bond held by some investment company, but letting the investment company cash in on the interest until the maturation of that CATS bond.

In other words, and I could be wrong here, so someone please correct me if I am, what you hold is now worth $6,000, and won't ever be worth more, as the coupons (or the interest bearing portion of the original government bond) has been stripped from the principle. I believe that the 2014 date and the interest refer to the original government bond that the CATS bond was issued against. Again, I could be wrong. Please verify!
posted by loquax at 9:34 PM on April 11, 2006

Amortization refers to the period and schedule over which interest is calulated to arrive at the maturation value in 2002. Capital gains tax liability refers to the tax you have to pay when an investment of yours makes money beyond what you invested in it. Arcane is a word meaning old and bizarre ;)
posted by loquax at 9:37 PM on April 11, 2006

Okay, loquax, that makes perfect sense to me. I just totally wasn't grasping that CATS were issued by an intermediary--In this case a bank with its main offices in a building on the southernmost corner of West Broadway.

While again I'm eager to hear any contrary opinions I must say that I am impressed with your ability to explain this in words I can understand. Well done!
posted by incomple at 9:41 PM on April 11, 2006

How do you know that it matured in 2002?

I know that third-parties structured some weird shit in the eighties, but I have an easier time believing that you have a 30-year STRIP than I do believing that you have a 17-year oddity.

If your bond has a CUSIP (a nine-character code) on it, post it here and I'll look it up on Bloomberg tomorrow.
posted by Kwantsar at 9:43 PM on April 11, 2006

How do you know that it matured in 2002?

The bond reads, in big bold print, "MATURITY DATE: NOV 15 2002". It is possible that I'm misinterpreting this--as I have nearly everything else about the bond--but it seems pretty clear.

Anyway, with regards to the CUSIP, I've checked it but the results are useless to me. It is, for reference, "156884RG5" and activequote.fidelity.com gives its result as "CERTIFICATES ACCRUAL TREAS SEC 0.000% 11/15/2002 P CPN 11/02 TB CATSRG5 156884RG5" None of which, again, means a thing to me. If you can tell me more about what it means I'll send you ten bucks once this is redeemed. In fact, you're all getting ten bucks!
posted by incomple at 9:52 PM on April 11, 2006

US STRIPS didn't start until after the craziness, didn't they? Late 80's, early 90's?
posted by loquax at 9:55 PM on April 11, 2006

Don't take my word for any of this, of course; this is not really my field of expertise :)
posted by ikkyu2 at 10:02 PM on April 11, 2006

"13 1/4% Interest due May 15, 2014" - that's definitely the underlying 30-year US treasury bond.

CATS were an invention of Salomon Brothers who were following Merrill Lynch's lead after that firm invented the TIGR (Treasury Investment Growth Receipt). The TIGRs stripped the underlying bond of its 60 coupon payments and created 50 zero coupons issues and one issuance consisting of the last 10 coupon payments and the face amount. If the CATS were structured like the TIGRs, I suppose each of those 50 issuances have maturities that align with the date of the underlying coupon payment, which explains the odd 17 year maturity. I'm just speculating - this was long before my time and I could be remembering my training incorrectly. Like Kwantsar said, this will be easy enough to figure out if we can find it on Bloomberg.
posted by mullacc at 10:18 PM on April 11, 2006

US STRIPS didn't start until after the craziness, didn't they? Late 80's, early 90's?

CATS and TIGRs were a synthetic way to achieve the same thing. The government introduced STRIPS in '85 after it saw the strong demand for the synthetics.
posted by mullacc at 10:21 PM on April 11, 2006

OK, here's the deal. It's worth $6000 and no more. And you have to cash it in at Salomon Brothers (now part of Citibank) if Salomon was the issuer, or maybe another bank will buy it from you then cash it in themselves. But ultimately the money will come from Salomon (i.e., Citibank, which bought Salomon Smith Barney).

What it represents is your share of the Nov 15 2002 interest payment on a US treaury bond that matures May 15, 2014. Treausry bonds pay interest every six months, so (as you can tell from the May 15 2014 date), that bond pays interest on May 15 and Nov 15 of every year up to May 2014.

But, you don't own a piece that bond. You own a slice of one specific interest payment on that bond, the interest payment which was made on Nov 15 2002.

When Salomon created this CATS which you hold, they went out and bought a huge amount of that bond which matures in 2014. Then, in their internal accounting, whenever they get the interest payments on the bond, they set aside a portion to cover the CATS which they issued. So you give them your CATS, and they give you $6000 set aside from the Nov 15 2002 interest payment they received on the bond.

That probably means that your CATS represents the credit risk of the issuer (presumably, Salomon), not the US government. The gov't gave the money to Salomon, and you have to collect from them.

As for taxes, well that'd probably be an inheritance tax question no different than if your grandmother left you $6000 cash.

Does that help? I can try again if you like.
posted by mono blanco at 3:08 AM on April 12, 2006

mullacc, mono blanco, thank you very much. I totally get it now.
posted by incomple at 6:00 AM on April 12, 2006

I'm curious about the tax liability generated by holding this bond. I'm pretty sure it's why the May 2014 information is on the bond, and I'm pretty sure that Treasury amended laws in 1982 because these CATS-type zero-coupon investments were allowing investors to obtain something equivalent to interest without paying taxes on actual interest.

Anyone know about that? Is our original poster liable for 17 years of back taxes on this instrument?
posted by ikkyu2 at 1:19 PM on April 12, 2006

ikkyu2: The 1982 tax legislation corrected the tax advantage that accrued to the issuer of the stripped coupon payment, according to this website.

In general, the imputed annual interest on a zero-coupon bond is taxed. You have to pay taxes each year even though you are not actually receiving a cash interest payment. The taxes could be deferred if the bond was held in some sort of retirement or custodial account. I don't know if CATS differ at all from this scenario (it doesn't look like STRIPS differ).
posted by mullacc at 1:58 PM on April 12, 2006