U.S. Government Debt
A security which gives the holder an undivided interest in a pool of mortgages is known as a: A unit investment trust B pass through certificate C first mortgage bond D face amount certificate
The best answer is B. The question defines a pass through certificate - an undivided interest in a pool of mortgages, where the mortgage payments are passed through to the certificate holders.
If Treasury bill yields are rising at auction, this indicates that: A interest rates are falling while bill prices are rising B interest rates are falling while bill prices are falling C interest rates are rising while bill prices are rising D interest rates are rising while bill prices are falling
The best answer is D. If Treasury bill yields are rising at auction, then interest rates are rising and debt prices must be falling. Review
The minimum denomination for a mortgage backed pass through certificate is: A $100 B $1,000 C $5,000 D $25,000
The best answer is D. 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 difficult to quantify risks of shortening or lengthening maturities, due to interest rates falling or rising, respectively. Review
Which of the following is a FALSE statement regarding Treasury Bills? A The maturity is 52 weeks or less B Treasury Bills trade at a discount to par C Treasury Bills are callable at any time at par D Payment is backed by the full faith and credit of the U.S. Government
The best answer is C. 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?) Review
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
The best answer is D. 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. Review
Which of the following trades settle in "clearing house" funds? A General Obligation Bonds B U.S. Government Bonds C Agency Bonds D GNMA Pass-Through Certificates
The best answer is A. 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 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
The best answer is A. 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.
Which statement is TRUE regarding the trading of government and agency bonds? A The trading market is very active, with narrow spreads B Trading is confined to the primary dealers C All government and agency securities are quoted in 32nds D The market is regulated by the Securities and Exchange Commission
The best answer is A. 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 not regulated by the SEC because these are exempt securities under the Securities Acts. However, the Federal Reserve regulates and audits the commercial banks that are its members, and the primary government dealers are mainly the large commercial banks.
Which statement is TRUE about TIPS? A The coupon rate is less than the rate on an equivalent maturity Treasury Bond B The coupon rate is equal to the rate on an equivalent maturity Treasury Bond C The coupon rate is a market approximation of the inflation rate D The coupon rate is a market approximation of the discount rate
The best answer is A. 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 plus the principal adjustment equal to that year's inflation rate.
Interest income received from a GNMA Pass-Through Certificate is: A subject to both federal and state income tax B exempt from both federal and state income tax C subject to federal income tax and exempt from state and local tax D exempt from federal income tax and subject to state and local tax
The best answer is A. Unlike Treasury obligations and regular agency debt, where interest income is subject to federal income tax, but is exempt from state and local tax, interest income from mortgage backed securities is subject to both federal and state income tax. This is the law because the interest payments made on the underlying mortgages are deductible to the homeowner making the mortgage payments at both the federal and state level, therefore the recipient of these payments should be taxed at both the federal and state level.
Which Treasury security is NOT sold on a regular auction schedule? A CMBs B Treasury Bills C STRIPS D TIPS
The best answer is A. 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 statement is TRUE regarding fully modified pass-through certificates issued by the Government National Mortgage Association? A Monthly payments of interest and principal are guaranteed by the U.S. Government B Only interest payments are guaranteed by the U.S. Government C Only principal payments are guaranteed by the U.S. Government D The yield at which the investor bought the certificate is guaranteed by the U.S. Government
The best answer is A. The "modification" to a fully modified Ginnie Mae Pass Through Certificate is the guarantee of the U.S. Government on the timely payment of both interest and principal. Review
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
The best answer is A. The U.S. Government issues Treasury Bills in book entry form only. No physical certificates are issued. Review
Which statement is TRUE regarding Government National Mortgage Association pass-through certificates? A GNMA securities are insured by the FDIC B Dealers typically quote GNMA securities on a basis point differential to equivalent maturity U.S. Government Bonds C Credit risk for GNMAs is higher than that for equivalent maturity Treasury Bonds D Reinvestment risk for GNMAs is the same as for equivalent maturity U.S. Government Bonds
The best answer is B. GNMA securities are not insured by the Federal Deposit Insurance Corporation - they are guaranteed by the U.S. Government giving these securities the same credit risk as a U.S. Treasury (none). 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.
Which statement is TRUE regarding Ginnie Mae Pass Through Certificates? A The certificates pay holders on a semi-annual basis B The certificates are self-amortizing C Each payment consists of interest only D After 30 years, the holder receives his or her original principal value
The best answer is B. 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. Since each monthly mortgage payment is a combined payment of interest and principal, the certificates are self-amortizing (self-liquidating) which means there is no return of the face value at maturity since the investor has been receiving principal throughout the issue's life.
When comparing the debt issues of Ginnie Mae to Fannie Mae, which statement is TRUE? A Both Ginnie Mae and Fannie Mae issues are backed by the implied guarantee of the U.S. Government B Ginnie Mae issues are backed by the full faith and credit of the U.S. Government and typically trade at lower yields than Fannie Mae issues C Fannie Mae issues are directly backed by the full faith and credit of the U.S. Government and typically trade at lower yields than Ginnie Mae issues D Both Fannie Mae and Ginnie Mae are directly backed by the full faith and credit of the U.S. Government
The best answer is B. 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. Based on their direct U.S. Government guarantee, Ginnie Mae issues typically trade at slightly lower yields when compared to Fannie Mae issues.
Which statement is TRUE regarding Government National Mortgage Association pass-through certificates? A GNMA securities have no reinvestment risk B Reinvestment risk for GNMAs is greater than that for equivalent maturity U.S. Government bonds C Reinvestment risk for GNMAs is the same as for equivalent maturity U.S. Government bonds D Reinvestment risk for GNMAs is less than that for equivalent maturity U.S. Government bonds
The best answer is B. 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). So, prepayment risk leads to 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.
Series EE bonds: A are issued at a discount to face B are redeemed at par plus interest earned C are issued in certificate form D are actively traded in the secondary market
The best answer is B. Series EE bonds are "savings bonds" issued by the U.S. Government with a minimum purchase amount of $25 (or more). This is the face value of the bond, and any interest earned is added to the bond's value. 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 statement is TRUE regarding Treasury Inflation Protection securities in periods of deflation? A The amount of each interest payment will stay the same and the principal amount received at maturity is unchanged at par B The amount of each interest payment will decline and the principal amount received at maturity is unchanged at par C The amount of each interest payment will stay the same and the principal amount received at maturity will decline D The amount of each interest payment will decline and the principal amount received at maturity will decline.
The best answer is B. 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. In periods of deflation, the principal amount is adjusted downwards. Even though the interest rate is fixed, the holder receives a lower interest payment, due to the decreased principal amount. In the situation where the principal amount has been adjusted below par due to deflation, when the bond matures, the holder receives par - not the decreased principal amount - a real benefit if an investor is concerned about deflation.
Which statement is TRUE when comparing Treasury Notes to Treasury STRIPS? A Treasury Notes pay interest annually B Treasury STRIPS pay interest at maturity C Treasury STRIPS pay interest semi-annually D Treasury Notes pay interest at maturity
The best answer is B. Treasury Notes are government obligations maturing between 1 year and 10 years which pay interest semi-annually. Treasury STRIPS are notes or bonds "stripped" of coupons, meaning all that is left is the principal repayment portion of the note or bond (sometimes called the "corpus" or body). STRIPS are zero coupon original issue discount obligations that do not have a stated interest rate. The accretion of the discount over the bond's life represents the interest earned.
Which statement is TRUE about the Federal National Mortgage Association (FNMA)? A FNMA is a publicly traded corporation that issues pass through certificates guaranteed by the U.S. Government B FNMA is a publicly traded corporation that issues pass through certificates which are not guaranteed by the U.S. Government C FNMA is owned by the U.S. Government and issues pass through certificates that are U.S. Government guaranteed D FNMA is owned by the U.S. Government and issues pass through certificates that are not guaranteed by the U.S. Government
The best answer is B. 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 statement is TRUE regarding GNMA "Pass Through" Certificates? A The certificates are quoted on a percentage of par basis with accrued interest computed on an actual day month/actual day year basis B The certificates are quoted on a percentage of par basis with accrued interest computed on a 30 day month/360 day year basis C The certificates are quoted on a yield basis with accrued interest computed on an actual day month/actual day year basis D The certificates are quoted on a yield basis with accrued interest computed on a 30 day month/360 day year basis
The best answer is B. GNMA certificates are quoted on a percentage of par basis in 32nds. Accrued interest on "agency" securities is computed on a 30 day month/360 day year basis. (Do not confuse this with the accrued interest on U.S. Government obligations, which is computed on an actual day month/actual day year basis).
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
The best answer is B. 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. Review
Which of the following designates "primary" U.S. Government securities dealers? A Securities and Exchange Commission B Federal Reserve C Office of the Comptroller of Currency D Congress
The best answer is B. The Federal Reserve designates a dealer as a "primary" dealer - meaning one entitled to trade with the Federal Reserve trading desk. There are about 20 primary dealers (such as Cantor Fitzgerald, Nomura Securities, Citibank, Goldman Sachs, J.P. Morgan, etc.) The rest of the government dealers are termed "secondary" dealers. They do not enjoy a special relationship with the Federal Reserve.
Which of the following is a TRUE statement regarding Fannie Mae? A Fannie Mae has only issued negotiable debt securities B Fannie Mae has only issued negotiable equity securities C Fannie Mae has issued negotiable debt and equity securities D Fannie Mae has not issued negotiable securities
The best answer is C. Fannie Mae is a privatized agency that is publicly traded. 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. Any security that trades is negotiable, so this term applies to Fannie Mae stock. The debt securities (mortgage backed pass through certificates) that are issued by Fannie Mae also trade over-the-counter. Remember that the debt market is an OTC market.
Which statement regarding Freddie Mac is FALSE? A Freddie Mac buys conventional mortgages from financial institutions B Freddie Mac is an issuer of mortgage backed pass-through certificates C Freddie Mac debt issues are directly guaranteed by the U.S. Government D Freddie Mac is a corporation that is publicly traded
The best answer is C. Freddie Mac - Federal Home Loan Mortgage Corporation - buys conventional mortgages from financial institutions and packages them into pass through certificates. These 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.
Which investment gives the greatest protection against purchasing power risk? A 10 year Double Barreled Bonds B 10 year Guaranteed Bonds C 10 year TIPS D 10 year STRIPS
The best answer is C. Purchasing power risk is the risk that inflation will cause interest rates to increase; and therefore, bond prices will fall. Since all of the choices have the same maturity, this is not a factor. "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.
All of the following statements regarding the trading of government and agency bonds are true EXCEPT? A Trading is performed by primary and secondary dealers B Trading is performed by the Federal Reserve C Trading takes place on the New York Stock Exchange D Issues are quoted in 1/32nds
The best answer is C. 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 not regulated by the SEC because these are exempt securities under the Securities Acts. However, the Federal Reserve regulates and audits the commercial banks that are its members, and the primary government dealers are mainly the large commercial banks. Trading of Government and agency obligations does not take place on the New York Stock Exchange. Almost the entire debt market (Treasuries, Corporates, Municipals) takes place over-the-counter.
The nominal interest rate on a TIPS approximates the: A discount rate B federal funds rate C real interest rate D expected interest rate
The best answer is C. 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.
Which of the following trades settle in "Fed" funds? A General Obligation Bonds B Convertible bonds C Agency Bonds D Corporate Bonds
The best answer is C. 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. 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. Convertible bonds by definition are corporate issues.
Interest income received from a GNMA Pass-Through Certificate is: A taxed the same as for Treasury obligations B taxed the same as for Municipal obligations C taxed the same as for corporate obligations D exempt from all taxes
The best answer is C. Unlike Treasury obligations and regular agency debt, where interest income is subject to federal income tax, but is exempt from state and local tax, interest income from mortgage backed securities is subject to both federal and state income tax. This is the law because the interest payments made on the underlying mortgages are deductible to the homeowner making the mortgage payments at both the federal and state level, therefore the recipient of these payments should be taxed at both the federal and state level. Note that interest income from corporate bonds is also taxable at both the federal and state level, so interest income from mortgage backed pass through securities is taxed in the same manner.
Which statement is FALSE about CMBs? A CMBs are used to smooth out cash flow B CMBs are sold at a discount to par C CMBs are sold at a slightly lower yield than T-Bills D CMBs are direct obligations of the U.S. government
The best answer is C. 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. Because they are sold on an irregular basis, they sell at slightly higher yields than equivalent maturity T-Bills. 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. Review
A customer wishes to buy a security that provides monthly payments for his retirement. Which of the following is suitable? A Treasury Bonds B Income Bonds C GNMA Pass Through Certificates D Treasury Notes
The best answer is C. Ginnie Mae Pass Through Certificates "pass through" monthly mortgage payments to the certificate holders. Each payment is a combination of interest and principal from the underlying mortgage pool. Treasury Bonds and Notes pay interest semi-annually. Income bonds pay interest only if the corporate issuer has sufficient earnings. Review
Treasury STRIPS are quoted by dealers: A as a percentage of par in minimum increments of $.10 B as a percentage of par in minimum increments of 1/8ths C as a percentage of par in minimum increments of 1/32nds D on a yield to maturity basis
The best answer is C. Long term government and agency securities, like T-Notes and T-STRIPS, are quoted in 32nds, T-Bills are quoted on a discount yield basis. Review
How is the interest income received from U.S. Government obligations taxed? A Subject to both federal and state income tax B Exempt from both federal and state income tax C Subject to federal income tax and exempt from state income tax D Exempt from federal income tax and subject to state income tax
The best answer is C. The interest income received from U.S. Government obligations is subject to federal income tax, but is exempt from state and local income taxes (one level of government cannot tax the other's obligations). Review
Trades of all of the following securities settle in Fed Funds EXCEPT: A U.S. Government bonds B U.S. Agency bonds C GNMA Pass-Through certificates D General Obligation bonds
The best answer is D. Corporate and municipal bond trades settle in clearing house funds. These are funds payable at a registered clearing house in 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.
All of the following statements are true about the Federal National Mortgage Association Pass-Through Certificates EXCEPT: A FNMA is a publicly traded company B interest payments are subject to state and local tax C certificates are issued in minimum units of $25,000 D the credit rating is considered the highest of any agency security
The best answer is D. FNMA is a publicly traded 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. Unlike GNMA, whose securities are directly U.S. Government guaranteed; FNMA only carries an "implicit" U.S. Government backing, so its credit rating is lower than that of GNMA. Interest received by the holder of a mortgage backed pass through security is fully taxable by both federal, state, and local government. Certificates are issued in minimum $25,000 denominations. For most investors this is too much money to invest, so they buy shares of a mutual fund that invests in these instruments instead.
All of the following statements are true regarding Government National Mortgage Association pass-through certificates EXCEPT: A GNMA securities are guaranteed by the U.S. Government B Dealers typically quote GNMA securities on a basis point differential to equivalent maturity U.S. Government Bonds C Credit risk for GNMAs is the same as for equivalent maturity U.S. Government Bonds D Reinvestment risk for GNMAs is the same as for equivalent maturity U.S. Government Bonds
The best answer is D. GNMA securities are guaranteed by the U.S. Government. Dealers typically quote agency securities, including Ginnie Maes, on a basis point differential to equivalent maturing U.S. Governments. Reinvestment risk is greater for Ginnie Maes than for U.S. Governments. Reinvestment risk is the risk that over a long-term investment time horizon, interest rates are dropping and payments received from investments are reinvested at lower and lower rates. Ginnie Mae pass through certificates make monthly payments that must be reinvested, as opposed to U.S. Governments which only make semi-annual payments. Furthermore, if market interest rates drop, the homeowners in the mortgage pool prepay their mortgages, and these early principal repayments must be reinvested, again at lower rates.
Regular way trades of U.S. Government bonds settle through the: A National Securities Clearing Corporation on the same day as trade date B National Securities Clearing Corporation on the business day after trade date C Federal Reserve System on the same day as trade date D Federal Reserve System on the business day after trade date
The best answer is D. Regular way trades of U.S. Government bonds settle through the Federal Reserve System in Fed Funds. Settlement of government securities trades takes place the business day following trade date. "Non-eligible" securities settle through national clearing houses, such as the NSCC - National Securities Clearing Corp., of which broker/dealers are members. These trades settle in 2 business days in clearing house funds.
A customer who lives in the state of New York who buys GNMA Pass-Through Certificate: A must include the interest income received on his federal tax return, but not his state tax return B does not include the interest income on his federal tax return, but must include it on his state tax return C excludes the interest income from both his federal tax return and his state tax return D must include the interest income receive on both his federal tax return and his state tax return Review
The best answer is D. Unlike Treasury obligations and regular agency debt, where interest income is subject to federal income tax, but is exempt from state and local tax, interest income from mortgage backed securities is subject to both federal and state income tax. This is the law because the interest payments made on the underlying mortgages are deductible to the homeowner making the mortgage payments at both the federal and state level, therefore the recipient of these payments should be taxed at both the federal and state level. Review
Which statement is TRUE about CMBs? A CMBs are sold at par at a regular weekly auction B CMBs are sold at a discount at a regular weekly auction C CMBs are sold at par on an "as needed" basis D CMBs are sold at a discount on an "as needed" basis
The best answer is D. 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.
Treasury notes and bonds are: A bearer securities B registered to interest only C registered to principal only D fully registered in book entry form
The best answer is D. Treasury Bills, Notes and Bonds are only available in book entry form. Review
Which statement about Treasury STRIPS is TRUE? A Treasury STRIPS are suitable investments for individuals seeking current income B Treasury STRIPS are not suitable investments for retirement accounts C The holder is subject to default risk D The holder is not subject to reinvestment risk
The best answer is D. Treasury STRIPS are government bonds that are "stripped" of coupons. Theses issues are very safe but do not provide current income. STRIPS are often placed into retirement accounts by conservative investors This is a zero coupon obligation with a "locked in" rate of return over the life of the bond (thus, it is not subject to reinvestment risk). Review
Which of the following investments is issued with a stated coupon rate and with a maximum maturity of 10 years? A Treasury Notes B Treasury Stock C Treasury Strips D Treasury Bonds
The best answer is A. Treasury Notes are government obligations maturing between 1 year and 10 years which pay interest semi-annually. Review
Treasury bonds: A are issued in minimum $100 denominations B are issued with maximum 20 year maturities C are issued at a discount D mature at par plus accrued interest
The best answer is A. Treasury bonds are issued at par in minimum denominations of $100 each, and pay interest semi-annually. Initial maturities can be up to 30 years. At maturity, the bondholder receives par. Review
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
The best answer is B. 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.
If Treasury bill yields are dropping at auction, this indicates that: A Treasury bill prices are rising and interest rates are rising B Treasury bill prices are rising and interest rates are falling C Treasury bill prices are falling and interest rates are rising D Treasury bill prices are falling and interest rates are falling
The best answer is B. If Treasury bill yields are dropping at auction, then interest rates are falling and debt prices must be rising. Review
A security which gives the holder an undivided interest in a pool of mortgages is known as a(n): A equity real estate investment trust B pass through certificate C first mortgage bond D mortgage real estate investment trust
The best answer is B. The question defines a pass through certificate - an undivided interest in a pool of mortgages, where the mortgage payments are passed through to the certificate holders. Real Estate Investment Trusts (REITs) are investment companies similar to closed end funds. In such an investment, one owns a trust unit; however the unit does not represent a undivided ownership interest in the underlying real estate or mortgages. Mortgage bonds are issued by corporations pledging real estate as collateral. Review
