DEBT- U.S. Government
A customer buys a $1,000 par 3 1/2% Treasury Bond, maturing July 1, 2045, at 106-4 on Thursday, June 30th in a regular way trade. The bond pays interest on January 1st and July 1st. How many days of accrued interest are due? A. 0 B. 182 C. 183 D. 365
A. 0 Interest on U.S. Government bonds accrues on an actual day month / actual day year basis. Interest accrues up to but not including settlement. Settlement on U.S. Governments is next business day. This trade settles on Friday, July 1st. If a bond trade settles on the interest payment date, no accrued interest is due since this is the exact cut-off date for the seller to receive his 6-month payment and the buyer to pick up the next 6-month period.
Treasury Bills are issued by the U.S. Government in which form? A. Book Entry B. Bearer C. Registered to Principal Only D. Registered to Principal and Interest
A. Book Entry The U.S. Government issues Treasury Bills in book entry form only. No physical certificates are issued.
Which of the following is the most likely purchaser of STRIPS? A. Pension fund B. Money market fund C. Individual seeking current income D. Individual wishing to avoid purchasing power risk
A. Pension fund Pension funds and retirement accounts are the large purchasers of STRIPS. These zero-coupon bonds are purchased at a deep discount and are held to maturity to fund future retirement liabilities. There is little credit risk, because the U.S. Treasury is a top credit. There is no current income because they don't pay until maturity. They have a huge amount of purchasing power risk as a long-term zero coupon obligation, but this is not an issue if they are held to maturity. Retirement plan managers like STRIPS because they don't have to worry about reinvestment risk - there are no semi-annual interest payments to reinvest! It is an investment that can be "tucked away" for 20 or 30 years, with no further work or worry on the part of the retirement fund manager.
If interest rates are rising rapidly, which U.S. Government debt prices would be LEAST volatile? A. Treasury Bills B. Treasury Notes C. Treasury Bonds D. Treasury STRIPS
A. Treasury Bills The shorter the maturity, the lower the price volatility of a negotiable debt instrument. Of the choices listed, Treasury Bills have the shortest maturity. Treasury STRIPS are a zero-coupon T-Bond issue with a long maturity, and would be the most volatile of all the choices offered.
All of the following statements are true regarding Treasury STRIPS EXCEPT: A. interest earned is subject to reinvestment risk B. interest income is accreted and taxed annuall C. the bonds are issued at a discount D. the bonds are zero coupon obligations
A. interest earned is subject to reinvestment risk Treasury STRIPS are bonds "stripped" of coupons, meaning all that is left is the principal repayment portion of the bond. This security is a zero coupon obligation which is an original issue discount. The accretion of the discount over the bond's life represents the interest earned. Even though no payments of interest are made annually, the discount must be accreted annually and is taxable as interest income earned. This investment is not subject to reinvestment risk since no interest payments are made. The rate of return on this bond is "locked in" at purchase. Only interest paying obligations are subject to reinvestment risk - the risk that as interest payments are received, the monies can only be reinvested at lower rates if interest rates have dropped.
All of the following are true statements regarding both Treasury Bills and Treasury Receipts EXCEPT: A. interest is paid at maturity B. the securities are sold at a discount C. the maturity is 1 year or less D. payment of interest and principal on the underlying security is guaranteed by the U.S. Government
A. interest is paid at maturity T-Bills mature in 52 weeks or less, while Treasury Receipts are long term bonds stripped of coupons (long term zero coupon obligations). Both are guaranteed by the U.S. Government; interest is paid at maturity; and both trade at a discount until maturity. Once the Federal government started "stripping" bonds itself (in 1986) and selling them to investors, the market for broker-created T-Receipts evaporated. However, 30 year T-Receipts will trade until they all mature.
A 20 year 3 3/4% Treasury Bond is quoted at 95-11 - 95-15. The bond pays interest on Jan 1st and Jul 1st. A customer sells 10M of the bonds. Approximately how much will the customer receive, disregarding commissions and accrued interest? A. $9,511.00 B. $9,534.38 C. $9,546.88 D. $9,576.23
B. $9,534.38 "10M" means that the customer is selling $10,000 par value of the bonds (M is Latin for $1,000). The customer sells to the dealer at the bid price, which is 95 and 11/32nds = 95.34375% of $10,000 par = $9,534.38.
All of the following agencies may issue securities EXCEPT: A. TVA B. FRB C. FHLMC D. FHLB
B. FRB The FRB - Federal Reserve Bank does not issue bonds. It is the nation's central bank. TVA (Tennessee Valley Authority). FHLMC (Federal Home Loan Mortgage Corporation), and FHLB (Federal Home Loan Bank) all issue debt securities.
Which is considered to be a direct obligation of the U.S. Government? A. Federal National Mortgage Association Pass Through Certificates B. Government National Mortgage Association Pass Through Certificates C. Federal National Mortgage Association Bonds D. Federal Home Loan Bank Bonds
B. Government National Mortgage Association Pass Through Certificates GNMA certificates are backed by a pool of mortgages, the full faith and credit of GNMA, as well as the full faith and credit of the U.S. Government. GNMA is empowered to appropriate the funds necessary to pay interest and principal on its obligations from the U.S. Treasury. As such, this is considered a direct obligation of the U.S. Government. FNMA and FHLB are implicitly backed; there is no direct guarantee.
An investor wishes to "lock in" an assured stream of interest payments for the next several years. The best recommendation to the customer is: A. Treasury Receipts B. Non-Callable Treasury Bonds C. AAA Rated Corporate Bonds with high call premiums D. AAA Rated Corporate Bonds trading at large premiums
B. Non-Callable Treasury Bonds The key term in the stem of this question is an "assured" stream of interest payments. To assure a stream of interest payments, the bond must be of the lowest risk. Treasury debt is of lower risk than any corporate obligation. Treasury bonds pay interest semi-annually, while Treasury Receipts are "zero-coupon" obligations, which only pay interest at maturity. Therefore, Treasury bonds meet the desired characteristic of a "stream" of interest payments.
A government securities dealer quotes a 3 month Treasury Bill at 6.00 Bid - 5.90 Ask. A customer who wishes to sell 1 Treasury Bill will receive: A. a dollar price quoted to a 5.90 basis B. a dollar price quoted to a 6.00 basis C. $5,900 D. $6,000
B. a dollar price quoted to a 6.00 basis Treasury Bills are quoted on a yield basis. From the basis quote, the dollar price is computed. A customer who wishes to sell will receive the "Bid" of 6.00. This means that the dollar price will be computed by deducting a discount of 6.00 percent from the par value of $100.
The Government National Mortgage Association: A. buys conventional mortgages from financial institutions for repackaging as pass through certificates B. buys FHA and VA guaranteed mortgages from financial institutions for repackaging as pass through certificates C. gives its implied backing to the payment of interest and principal on mortgages purchased from financial institutions D. issues mortgages directly on U.S. Government subsidized housing
B. buys FHA and VA guaranteed mortgages from financial institutions for repackaging as pass through certificates Ginnie Mae buys FHA and VA guaranteed mortgages from banks and assembles them into pools. GNMA then sells undivided interests in these pools as pass-through certificates. The monthly mortgage payments are passed through to the certificate holders. GNMA guarantees the payment of interest and principal on the underlying mortgages and has the direct backing of the U.S. Government. The agencies that have an implied U.S. Government backing are Fannie Mae and Freddie Mac.
An investor in 30 year Treasury Bonds would be most concerned with: A. credit risk B. purchasing power risk C. marketability risk D. call risk
B. purchasing power risk The primary risk associated with holding long term U.S. Government obligations is "purchasing power" risk. This is the risk that inflation reduces the value of future interest payments and the principal repayment yet to be received in the future.
Sallie Mae debentures are backed by: A. the full faith and credit of the U.S. Government B. the full faith and credit of the Student Loan Marketing Association C. designated pooled mortgages D. designated pooled student college loans
B. the full faith and credit of the Student Loan Marketing Association "Sallie Mae" is the Student Loan Marketing Association. Sallie Mae raises money to lend to college students. It does this primarily by issuing debentures to the public. These debentures are backed by the faith and credit of this agency. Sallie Mae is another agency that is "privatized." Sallie Mae stock is listed and trades on NASDAQ.
A customer buys 5M of 6 1/4% Treasury Bonds at 100. How much interest income will the customer receive at each interest payment? A. $31.25 B. $62.50 C. $156.25 D. $312.50
C. $156.25 "5M" means that 5-$1,000 bonds are being purchased (M is Latin for $1,000). Annual interest on the bonds is 6.25% of $5,000 face amount equals $312.50. Since interest is paid twice per year, each payment will be for $156.25.
The minimum denomination on a mortgage backed pass through certificate is: A. $1,000 B. $10,000 C. $25,000 D. $100,000
C. $25,000 Mortgage backed pass through certificates are sold in minimum denominations of $25,000 (instead of the typical $1,000 for other bonds and $100 for Treasury issues). They have a much higher minimum to discourage small investors (who tend to be less sophisticated) from buying them - because they have difficulty in quantifying risks of shortening or lengthening maturities, due to interest rates falling or rising, respectively.
A 5 year 3 1/2% Treasury Note is quoted at 101-4 - 101-8. The note pays interest on Jan 1st and Jul 1st. A customer buys 5M of the notes. How much will the customer pay, disregarding commissions and accrued interest? A. $5,056.25 B. $5,070.00 C. $5,062.50 D. $5,090.00
C. $5,062.50 "5M" means that the customer is buying $5,000 par value of the notes (M is Latin for $1,000). A customer will buy at the ask price, which is 101 and 8/32nds = 101.25% of $5,000 par = $5,062.50.
Treasury Bills, Bonds, and Notes Date Rate Bid Ask Yield Jan 21 3 5/8 98-27 98-31 3.67 Feb 21 3 1/2 94-14 95 3.68 Feb 25 3 7/8 95-01 95-06 4.07 Feb 27 4 3/4 119-07 119-13 3.97 A customer who buys 5M of the Feb 27 4 3/4% bonds will pay (excluding commissions): A. $5,956.50 B. $5,960.94 C. $5,970.31 D. $5,993.75
C. $5,970.31 The bonds are purchased at the ask price of 119-13 = 119 and 13/32nds = 119.40625% of $5,000 par = $5,970.31.
100 Basis points equals: A. .01% B. .1% C. 1% D. 10%
C. 1% One basis point equals .01%, so 100 basis points equals 1%.
If interest rates are rising rapidly, which U.S. Government debt prices would be MOST volatile? A. Treasury Bills B. Treasury Notes C. Treasury Bonds D. Series EE Bonds
C. Treasury Bonds The longer the maturity, the greater the price volatility of a negotiable debt instrument. Of the choices listed, Treasury Bonds have the longest maturity. Series EE bonds have no price volatility since they are non-negotiable.
Which of the following investments gives a rate of return that cannot be affected by "reinvestment risk"? A. Treasury Notes B. Treasury Stock C. Treasury Strips D. Treasury Bonds
C. Treasury Strips Treasury "STRIPS" are bonds which have been stripped of coupons - essentially they are zero coupon Treasury obligations. The rate of return on the bonds is "locked in" at purchase since the discount represents the compounded yield to be earned over the life of the bond. Because no interest payments are received, the bond is not subject to reinvestment risk - the risk that interest rates will drop and the interest payments will be reinvested at lower rates.
Which investment gives the LEAST protection against purchasing power risk? A. 6 month Treasury Bill B. 10 year Treasury Note C. 10 year Treasury "TIPS" D. 10 year Treasury "STRIPS"
D. 10 year Treasury "STRIPS" Purchasing power risk is the risk that inflation will cause interest rates to increase; and therefore, bond prices will fall. Treasury "TIPS" are Treasury Inflation Protection Securities - the principal amount of these securities is adjusted upwards with the rate of inflation. Even though the interest rate is fixed, the holder receives a higher interest payment, due to the increased principal amount. When the bond matures, the holder receives the higher principal amount. Thus, there is no purchasing power risk with these securities. Treasury STRIPS are zero-coupon Treasury obligations - these have the highest level of purchasing power risk. In contrast, 6 month Treasury bills have a low level of purchasing power risk. Since they will mature at par in the near future, their value cannot fall very far below this if interest rates rise.
All of the following statements describe Freddie Mac EXCEPT: A. Freddie Mac buys conventional mortgages from financial institutions B. Freddie Mac is an issuer of mortgage backed pass-through certificates C. Freddie Mac is a corporation that is publicly traded D. Freddie Mac debt issues are directly guaranteed by the U.S. Government
D. Freddie Mac debt issues are directly guaranteed by the U.S. Government Freddie Mac - Federal Home Loan Mortgage Corporation - buys conventional mortgages from financial institutions and packages them into pass through certificates. Freddie Mac pass through certificates are not guaranteed by the U.S. Government (unlike GNMA pass through certificates). This agency has been partially sold off to the public as a corporation that was listed on the NYSE. Freddie is now bankrupt due to excessive purchases of bad "sub prime" mortgages and has been placed in government conservatorship. Its shares have been delisted from the NYSE and now trade OTC in the Pink OTC Markets.
Treasury Bills cannot be used as the underlying collateral for Treasury Receipts because: A. Treasury Bills are not Agency securities B. Treasury Bills are a direct obligation of the U.S. Government C. the maturity of a Treasury Bill is too long D. the maturity of a Treasury Bill is too short
D. the maturity of a Treasury Bill is too short The physical securities which are held in trust against the issuance of Treasury Receipts are either Treasury Notes or Treasury Bonds. Treasury Bills cannot be used because their maturities are too short.
If Treasury bill yields are rising at auction, this indicates that:(choose all that apply) I interest rates are falling II interest rates are rising III Treasury bill prices are falling IV Treasury bill prices are rising
I and III If Treasury bill yields are rising at auction, then interest rates are rising and debt prices must be falling.
Which statements are TRUE regarding the actions of the Federal Reserve in the trading of U.S. Government Debt?(choose all that apply) I The Federal Reserve acts as a dealer II The Federal Reserve does not act as a dealer III The Federal Reserve deals directly with primary dealers IV The Federal Reserve does not deal directly with primary dealers
I and III The Federal Reserve designates a dealer as a "primary" dealer - meaning one entitled to trade with the Federal Reserve trading desk. The Federal Reserve designates a dealer as primary after the firm demonstrates over many years its capacity to purchase Treasury securities at the weekly auction and to make an orderly trading market in these issues. The rest of the government dealers are termed "secondary" dealers. They do not enjoy a special relationship with the Federal Reserve. The Federal Reserve itself is a daily trading partner with the primary dealers. The Federal Reserve maintains a large inventory of Treasury securities (so it is a dealer) and trades them with the primary dealers to control credit availability. If the Fed wants to loosen credit, it buys Treasury securities from the primary dealers, giving them cash to lend out - and this lowers market interest rates. If the Fed wants to tighten credit, it sells Treasury securities to the primary dealers, draining them of cash, so fewer loans can be made - and this raises market interest rates.
Which statements are TRUE regarding Treasury debt instruments?(choose all that apply) I T-Notes are sold by competitive bidding at auction conducted by the Federal Reserve II T-Notes are sold by negotiated offering III T-Notes are issued in book entry form with no physical certificates issued IV T-Notes are issued in bearer form
I and III Treasury Notes are issued in book entry form only. No certificates are issued for book entry securities; the only ownership record is the "book" of owners kept by the transfer agent. U.S. Government debt is sold via competitive bidding at a weekly auction conducted by the Federal Reserve.
Which statements are TRUE about the risks associated with federal agency securities? (choose all that apply) I Agency securities have market risk II Agency securities have virtually no market risk III Agency securities have credit risk IV Agency securities have virtually no credit risk
I and IV U.S. Government Agency Bonds (as with any fixed income security), have market risk. If interest rates rise, their prices will drop, with longer maturity and lower coupon issues dropping much faster than shorter maturity and higher coupon issues. Agencies also have virtually no credit risk since they are implicitly backed by the U.S. Government (with the exception of Ginnie Mae issues which are directly backed).
Which of the following statements are TRUE about the Federal National Mortgage Association (FNMA)? (choose all that apply) I FNMA is a publicly traded corporation II FNMA is owned by the U.S. Government III FNMA pass through certificates are guaranteed by the U.S. Government IV FNMA pass through certificates are not guaranteed by the U.S. Government
I and IV Fannie Mae performs the same functions as Ginnie Mae except that its pass through certificates are not guaranteed by the U.S. Government; and it has been "sold off" as a public company. Its stock was listed for trading on the NYSE, but Fannie went "bust" in 2008 after purchasing too many "sub prime" mortgages and was placed into government conservatorship. Its shares were delisted from the NYSE and now trade OTC in the Pink OTC Markets.
Which of the following statements are TRUE regarding Government National Mortgage Association pass-through certificates? (choose all that apply) I GNMA securities are guaranteed by the U.S. Government II GNMA securities are not guaranteed by the U.S. Government III Reinvestment risk for GNMAs is the same as for equivalent maturity U.S. Government bonds IV Reinvestment risk for GNMAs is greater than that for equivalent maturity U.S. Government bonds
I and IV GNMA securities are guaranteed by the U.S. Government. Reinvestment risk is greater for Ginnie Maes than for U.S. Governments. If the mortgages backing a Ginnie Mae Pass Through Certificate are prepaid (if interest rates have dropped), the certificate holders receive payments that are a return of principal, and that, when reinvested at lower current rates, produce a lower return (this is reinvestment risk). In contrast, payments received from other Treasury securities consist of interest only, so if interest rates drop over the time period these securities are held, only the interest must be reinvested at lower rates; there is no principal return that must be reinvested until maturity.
Treasury Notes: (choose all that apply) I pay interest semi-annually II pay interest at maturity III mature in under 1 year IV mature between 1 and 10 years
I and IV Treasury Notes are government obligations maturing between 1 year and 10 years which pay interest semi-annually.
Regarding Ginnie Mae Pass Through Certificates: (choose all that apply) I The certificates pay holders on a monthly basis II The certificates pay holders on a semi-annual basis III Each payment consists of interest only IV Each payment consists of a combination of interest and principal
I and IV Ginnie Mae Pass Through Certificates "pass through" monthly mortgage payments to the certificate holders. Each payment is a combination of both interest and principal paid from the underlying mortgage pool.
When comparing the debt issues of Ginnie Mae to Fannie Mae, which statements are TRUE?(choose all that apply) I Ginnie Mae issues are directly backed by the full faith and credit of the U.S. Government II Ginnie Mae issues are not directly backed by the full faith and credit of the U.S. Government III Fannie Mae issues are directly backed by the full faith and credit of the U.S. Government IV Fannie Mae issues are not directly backed by the full faith and credit of the U.S. Government
I and IV Ginnie Maes (Government National Mortgage Association issues) are directly backed by the faith and credit of the U.S. Government, since Uncle Sam owns the agency. Fannie Maes (Federal National Mortgage Association issues) are implicitly (indirectly) backed by the Federal Government.
Which of the following trades settle in "clearing house" funds? (choose all that apply) I General Obligation Bonds II U.S. Government Bonds III Agency Bonds IV GNMA Pass-Through Certificates
I only Corporate and municipal bond trades settle in clearing house funds. These are funds payable at a registered clearing house, which are usually not good funds for three business days. These trades are settled through NSCC - the National Securities Clearing Corporation. U.S. Government and agency bond trades settle in Federal Funds, which are good funds the business day of the funds transfer (next business day for regular way settlement of government securities). Ginnie Mae Pass-Through certificates are U.S. Government guaranteed, so trades settle in Fed Funds. These trades are settled through GSCC - the Government Securities Clearing Corporation.
Which of the following statements are TRUE regarding the trading of government and agency bonds?(choose all that apply) I The trading market is very active, with narrow spreads II Trading is confined to the primary dealers III All government and agency securities are quoted in 32nds IV The market is regulated by the Securities and Exchange Commission
I only The government obligation trading market is the deepest and most active market in the world. Trading is performed by both the primary and secondary dealers, and by the Federal Reserve trading desk. While long term government and agency securities are quoted in 32nds, T-Bills are quoted on a discount yield basis. The market is unregulated - these are exempt securities under the Securities laws, however the Federal Reserve does exert influence over the primary dealers.
Which of the following statements are TRUE about Treasury Receipts?(choose all that apply) I The underlying securities are backed by the full faith and credit of the U.S. Government II The interest coupons are sold off separately from the principal portion of the obligation III The securities are purchased at a discount IV The securities mature at par
I, II, III, and IV Treasury Receipts are zero coupon Treasury obligations (which are directly backed by the full faith and credit of the U.S. Government) created by broker/dealers who buy Treasury Bonds or Treasury Notes and strip them of their coupons, keeping the corpus of the bond only. The bonds are put into a trust, and "units" of the trust are sold to investors. Treasury Receipts are purchased at a discount and mature at par. The discount earned over the life of the bond is the "interest income." Once the Federal government started "stripping" bonds itself (in 1986) and selling them to investors, this market evaporated. However, 30 year T-Receipts will trade until they all mature.
Which of the following are TRUE statements regarding Treasury Bills? (choose all that apply) I The maturity is 52 weeks or less II Treasury Bills are callable at any time at par III Treasury Bills trade at a discount to par IV Payment is backed by the full faith and credit of the U.S. Government
I, III, and IV Treasury Bills are original issue discount obligations of the U.S. Government which mature in 52 weeks or less. They are not callable (as a rule, short term obligations are never callable - why would the issuer bother calling in obligations that will mature in the near future?)
A customer buys a $1,000 par Treasury Inflation Protection security with a 4% coupon and a 10 year maturity. If the inflation rate during the first year of the security's life is 5%, the:(choose all that apply) I coupon rate is adjusted to 9% II coupon rate remains at 4% III principal amount is adjusted to $1,050 IV principal amount remains at $1,000
II and III Treasury "TIPS" are Treasury Inflation Protection Securities - the principal amount of these securities is adjusted upwards with the rate of inflation. Even though the interest rate is fixed, the holder receives a higher interest payment, due to the increased principal amount. When the bond matures, the holder receives the higher principal amount. Thus, there is no purchasing power risk with these securities.
Which of the following statements are TRUE regarding trades of U.S. Government bonds? (choose all that apply) I Regular way trades settle on the same day as the trade date II Regular way trades settle on the business day after trade date III Trades settle in Fed Funds IV Trades settle in Clearing House funds
II and III Trades of U.S. Government securities settle "regular way" the next business day in Fed Funds (funds payable through Federal Reserve member banks) In contrast, trades of corporate and municipal securities settle in "Clearing house funds."
Treasury Receipts: (choose all that apply) I pay interest semi-annually II pay interest at maturity III are essentially zero coupon T-Notes or T-Bonds IV are essentially zero coupon T-Bills
II and III Treasury Receipts are "zero coupon" Treasury bonds or Treasury notes that pay interest earned at maturity.
Which statements are TRUE when comparing Treasury Notes to Treasury Bills? I Treasury Bills have a longer initial maturity II Treasury Notes have a longer initial maturity III Treasury Bills pay interest semi-annually IV Treasury Notes pay interest semi-annually
II and IV Treasury Notes have a maximum maturity of 10 years and pay interest semi-annually. T-Bills have a maximum maturity of 12 months; and are original issue discount obligations that mature at par. When the bills mature, the difference between the purchase price and the redemption value at par is the interest income that is earned.
Which statements are TRUE about CMBs?(choose all that apply) I CMBs are sold at par II CMBs are sold at a discount to par III CMBs are sold at a regular weekly auction IV CMBs are sold on an "as needed" basis
II and IV CMBs are Cash Management Bills. They are sold at auction by the Treasury on an "as needed" basis to meet unexpected cash shortfalls, so they are not part of the regular auction cycle. They are the shortest-term U.S. government security, often with maturities as short as 5 days. They are sold in $100 minimums at a discount to par value, just like Treasury Bills.
Which investment does NOT have purchasing power risk? (choose all that apply) I STRIPS II TIPS III Treasury Bonds IV Treasury Bills
II and IV Purchasing power risk is the risk that inflation will cause interest rates to increase; and therefore, bond prices will fall. "TIPS" are Treasury Inflation Protection Securities - the principal amount of these securities is adjusted upwards with the rate of inflation. Even though the interest rate is fixed, the holder receives a higher total payment, due to the increased principal amount. When the bond matures, the holder receives the higher principal amount. Thus, there is no purchasing power risk with these securities. STRIPS are zero-coupon Treasury obligations - these have the highest level of purchasing power risk. If there is inflation, market interest rates are forced upwards, and zero-coupon bonds such as STRIPS fall dramatically in price (Treasury Receipts are broker-created zero-coupon bonds). Long term T-Bonds are also susceptible to purchasing power risk, though not as badly as long-term zero-coupon bonds. Money market instruments, such as T-Bills, do not have purchasing power risk, because they mature within 1 year and the funds can be reinvested at higher interest rates caused by inflation. Thus, the securities that have the lowest purchasing power risk are short term money market instruments and TIPS.
Series EE bonds: (choose all that apply) I are negotiable II are non-negotiable III pay interest semi-annually IV pay interest at redemption
II and IV Series EE bonds are "savings bonds" issued by the U.S. Government with a minimum purchase amount of $25 (or more). The interest rate is set at the date of issuance. Interest is "earned" monthly and credited to the principal amount every 6 months. The bonds have no stated maturity - the holder can redeem at any time, however interest is only credited to the bonds for 30 years. Savings bonds do not trade - they are issued by the Treasury and are redeemed with the Treasury. No physical certificates are issued - the bonds are issued in electronic form.
Which of the following agencies issuing mortgage backed pass through certificates is (are) restricted to purchasing conventional mortgages that are not VA or FHA insured?(choose all that apply) I Fannie Mae II Ginnie Mae III Freddie Mac
II only Freddie Mac - Federal Home Loan Mortgage Corporation - buys conventional mortgages from financial institutions and packages them into pass through certificates. This agency was partially sold off to the public as a corporation that was listed on the NYSE. Fannie Mae (Federal National Mortgage Association) buys FHA and VA insured mortgages from financial institutions and packages them into pass through certificates. This agency was sold off to the public as a corporation that was listed on the NYSE. Both Fannie and Freddie are now bankrupt due to excessive purchases of bad "sub prime" mortgages and have been placed in government conservatorship. Their shares have been delisted from the NYSE and now trade OTC in the Pink OTC Markets. Ginnie Mae (Government National Mortgage Association) performs the same function as Fannie Mae except that its pass through certificates are guaranteed by the U.S. Government. It remains an agency of the government and cannot be "sold off" as a public company as long as the government continues to guarantee its securities.
Which statements are TRUE regarding Government National Mortgage Association pass-through certificates?(choose all that apply) I GNMA securities are insured by the FDIC II Dealers typically quote GNMA securities at 50 basis points over equivalent maturity U.S. Government Bonds III Credit risk for GNMAs is the same as for equivalent maturity U.S. Government Bonds IV Reinvestment risk for GNMAs is the same as for equivalent maturity U.S. Government Bonds
III and IV only GNMA securities are not insured by the Federal Deposit Insurance Corporation (making Choice I incorrect) - they are guaranteed by the U.S. Government (making Choice III correct). Dealers typically quote agency securities, including Ginnie Maes, on a basis point differential to equivalent maturing U.S. Governments. A typical quote is 50 basis points above the yield on the same maturity U.S. Government issue. Please note, that dealers also quote agency securities on a percentage of par basis in 32nds, but this is not given as a choice in the question. Reinvestment risk is greater for Ginnie Maes than for U.S. Government bonds. Ginnie Mae holders receive monthly payments that must be continuously reinvested while T-Bond holders only receive payments every 6 months that must be reinvested. The greater the frequency of receipt of payments that must be reinvested, the greater the reinvestment risk.
All of the following trade "and interest" EXCEPT: A. Treasury Bills B. Treasury Notes C. Treasury Bonds D. Corporate Bonds
A. Treasury Bills Original issue discount obligations trade "flat" - without accrued interest. Every day the issue is held, its value increases towards the redemption price of par. This increase in value is the interest income earned on the obligation. Obligations issued at par make periodic interest payments. They trade "and interest" - with accrued interest. These include Treasury Notes, Treasury Bonds, Corporate Bonds, and Municipal Bonds.
The nominal interest rate on a TIPS approximates the: A. discount rate B. federal funds rate C. real interest rate D. expected interest rate
C. Real interest rate The interest rate placed on a TIPS (Treasury Inflation Protection Security) is less than the rate on an equivalent maturity Treasury Bond. For example, a 30 year Treasury Bond might have a coupon rate of 4%; but a 30 year TIPS has a coupon rate of 2.75%. The "difference" between the two is the current market expectation for the inflation rate (1.25% in this example). The coupon rate on the TIPS approximates the "real interest rate" - the rate earned after factoring out inflation. If 30 year T-Bonds have a nominal yield of 4%; and the inflation rate is expected to be 1.25%; then the "real" interest rate is 2.75%. The reason why the TIPS sells at a lower coupon rate is that, every year, the principal amount is adjusted upwards by that year's inflation rate. So there are really 2 components of return on a TIPS - the lower coupon rate (the "real" interest rate) plus an adjustment equal to that year's inflation rate.
A pass through certificate is best described as a: A. corporation or trust through which investors pool their money in order to obtain diversification and professional management B. security which is backed by the full faith, credit, and taxing power of the U.S. Government C. security which is backed by real property and/or a lien on real estate D. security which gives the holder an undivided interest in a pool of mortgages
D. security which gives the holder an undivided interest in a pool of mortgages A pass through certificate is a security which gives the holder an undivided interest in a pool of mortgages. The mortgage payments are "passed through" to the certificate holders.
A 5 year 3 1/2% Treasury Note is quoted at 101-4 - 101-8. The note pays interest on Jan 1st. and Jul. 1st. Which of the following statements are TRUE regarding these T-Notes? (choose all that apply) I Interest accrues on an actual day month; actual day year basis II Interest accrues on a 30 day month / 360 day basis III The trade will settle in Fed Funds IV The trade will settle in Clearing House Funds
I and III Government bond accrued interest is computed on an actual month/actual year basis. Trades settle through the Federal Reserve system in "Fed Funds."
Treasury Bonds are issued by the U.S. Government in:(choose all that apply) I bearer form II book entry form III minimum denominations of $100 IV minimum denominations of $10,000
II and III The U.S. Government issues Treasury Bonds (and Treasury Bills and Notes) in book entry form, in minimum denominations of $100.
