Harvard Business School
Rev. September 7, 1995
On November 17, 1983, Josephine Baker received a prospectus from A.G. Becker Paribas regarding an offering of COUGARs (Certificate on Government Receipts see Exhibit 1). Ms. Baker had worked for the fixed-income research department of Greenwich Mutual Funds for over a year, and while she had specialized in the U.S. Government Treasury market, she had never seen this type of offering. As the U.S. Government Treasury market was the largest and most vital segment of the U.S. debt markets, Ms. Baker was understandably dubious when the investment banks began touting these securities as revolutionary. Greenwich Mutual Funds managed over $50 billion, of which $20 billion was invested in fixed-income securities. More particularly, a $3 billion fund was dedicated to investing in U.S. government securities. At this time, the U.S. Treasury had $1.4 trillion in obligations outstanding and had raised $161 billion in 1983 alone. Since her arrival in Greenwich, the mutual fund business had grown increasingly competitive, with many new entrants competing for funds, particularly in the government market. As a result of this fierce competition, every basis point (1/100th of a percent point) of yield was vital for the advertising campaigns that would attract additional funds from investors. This pressure forced managers in the government market to become more creative in their search for new instruments and tactics to garner additional yield. In order to respond to the varied needs of their customers, a number of investment banks had created vehicles similar to the one created by A.G. Becker Paribas. In each of these vehicles, investment banks arranged for a custodian bank in this case, Manufacturers Hanover to pass through the payments of interest and principal from an underlying U.S. Treasury bond to investors who chose the particular payments they were interested in receiving. Effectively, these investment banks were stripping the payment stream of an underlying bond and allowing investors to choose the combination of payments they were interested in. This stripping was accomplished by creating a pass-through trust where the investors in the trust were granted all the credit and tax benefits of actually owning U.S. Treasuries. In effect, these trusts exclusively held U.S. Treasuries as assets and issued liabilities that exactly corresponded to the payment stream they would receive on the U.S. Treasuries. Moreover, to avoid any reinvestment risk, the payment dates on the assets and liabilities of the trust were exactly the same.
In examining the COUGARs, Ms. Baker began her analysis by coupling the prospectus with quotes from the prior day’s Treasury market trading (see Exhibit 2). She first considered the advantages and differences of these securities versus Treasuries of similar maturities. For example, she compared the COUGAR maturing on November 15, 1985, which had a yield to maturity of 10.85%, with two Treasuries maturing on that date that had a yield to maturities of approximately Research Associate Mihir Desai prepared this case under the supervision of Scott Mason as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright © 1994 by the President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685 or write Harvard Business School Publishing, Boston, MA 02163. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.
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10.50%. As the credit backing the COUGARs and the respective Treasuries was the same, she...
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