What Are Tiger Bonds?

Treasury investors growth receipts (TIGR), better known as "Tiger" bonds, are a type of zero-coupon bond originally issued by the U.S. Treasury. Tiger bonds do not pay interest over time, but instead are sold at a severe discount and, once mature, pay out at the full market price they had when issued. Because they are based on bonds issued by a government agency, tiger bonds are more stable than some other zero-coupon bond types.

Tiger bonds were created when Merrill Lynch stripped the coupon and principal from U.S. Treasury-issued bonds in 1982, repackaging them as separate securities. The acronym of the repackaged bond, TIGR, led to the bonds being known as "tiger" bonds. The new tiger bonds fit in with other bank-issued U.S. Treasury zero-coupon bonds, known collectively as certificates of accrual on treasury securities or "CATS."

Because tiger bonds are based on bonds issued by the U.S. Treasury Department, the bonds are guaranteed against loss and are considered to be a risk-free investment. Like other zero-coupon bonds, bondholders know the exact amount their bonds will be worth when they mature. As long as the bonds are held until maturity, they provide a stable investment that grows in value at a predetermined rate until they reach the market value they had upon creation.

The initial investment required to purchase a tiger bond is significantly lower than the final market value the bond will have once it reaches maturity, with maturity periods on the bonds ranging from 10 to 30 years. The cost of the bond is reduced by the amount of the potential interest payments that were stripped from the market price; as the bond increases in value toward its market price, it does so at the same rate as the interest that was removed from it. The longer it takes a tiger bond to reach maturity, the lower the cost of the initial investment.

Tiger bonds are available from Merrill Lynch or other banks and investment firms that offer investment products from a variety of sources. Once mature, the bonds can be cashed out through the investment firm that issued them or from most other investment brokers. If a brokerage cannot cash out your tiger bonds, ask them for the contact information of a local transfer agent who can handle the bonds for you.

Tiger bonds and CATS are not as in demand as they once were, as the U.S. Treasury created its own zero-coupon bonds in 1986 and began offering them for sale directly to the public. These bonds, separate trading of registered interest and principal of securities ("STRIPS"), offer the same government backing and stability of tiger and CATS bonds but do not require the bond purchaser to use a third-party broker or investment firm.