Financial Markets and Institutions (2-downloads)

Profiting from a New Financial Product:

A Case Study of Treasury Strips

We have seen that the advent of high-speed computers, which lowered the cost of

processing financial transactions, led to such financial innovations as bank credit and

debit cards. Because there is money to be made from financial innovation, it is impor-

tant for managers of financial institutions to understand the thinking that goes into

producing new, highly profitable financial products that take advantage of computer

technology. To illustrate how financial institution managers can figure out ways to

increase profits through financial innovation, we look at Treasury strips, a financial

instrument first developed in 1982 by Salomon Brothers and Merrill Lynch. (Indeed,

this innovation was so successful that the U.S. Treasury copied it when they issued

STRIPS in 1985, as discussed in Chapter 12.)

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