Part 2 Unit 7

A U.S. Treasury bond is quoted at 103:24. The dollar amount represented by this quote is A) $1,037.50. B) $1,032.40. C) $103.24. D) $1,030.24.

A) $1,037.50. Explanation: Treasury bonds are quoted in fractions of 32nds. In fractions, this translates to 103¾ (24/32). That is $1,030 plus ¾ of $10 ($7.50).

Which of the following statements regarding Sallie Mae debentures are true? I. Interest is generally paid monthly. II. Interest is generally paid semiannually. III. Interest is exempt from state and local taxation. IV. Interest is not exempt from state and local taxation. A) II and III B) I and III C) II and IV D) I and IV

A) II and III Explanation: As a general rule, debentures pay interest every six months. Further, interest on nonmortgage-backed government securities is taxable at the federal level and exempt from state and local taxation.

Interest on direct debt issued by the U.S. government is taxable at A) different levels in different states. B) the federal level and exempt at the state level. C) the federal and state level. D) the state level only.

B) the federal level and exempt at the state level Explanation: Interest on direct debt (T-bills, T-notes, T-bonds, and STRIPS) is taxable by the federal government but not by state or local governments.

An individual with $100,000 to invest will require these funds in six months for the purchase of a house. In which of the following circumstances did the registered representative act correctly? A) The registered representative convinced the client to purchase a $100,000 lump sum fixed annuity on the basis of its backing by an insurance company. B) The registered representative convinced the client to invest in an IPO on the basis of its high-growth prospects. C) The registered representative convinced the client to invest in a Treasury bill on the basis of its safety. D) The registered representative convinced the client to invest in a REIT as a hedge against the rise of real estate values until the client purchases the house.

C) The registered representative convinced the client to invest in a Treasury bill on the basis of its safety. Explanation: Investment in a Treasury bill is the only suitable investment among the choices listed. Purchase of annuities and a REIT are long-term investments not suitable to an individual who wants to invest funds on a short-term basis. Although an IPO may be liquid, it is not suitable for short-term funds earmarked for the purchase of a house because there is too much risk to the principal.

A quote of 2.20 bid 2.18 offered would most likely be a quote on A) a Ginnie Mae bond. B) a T-bond. C) a T-bill. D) a general obligation bond.

C) a T-bill. Explanation: Discounted instruments (such as T-bills) are quoted on a discount yield basis. Even though the number representing the bid is higher than the ask, it would be lower when converted into dollars. The greater the yield, the lower the price.

notes on noninterest-bearing securities

Noninterest-bearing securities, like zeroes, are quoted based on their yield to maturity. They are sold at a discount and mature at par.

What are Fannie Mae (FNMA) and Freddie Mac (FHLMC)?

The FNMA and FHLMC are government-sponsored corporations owned by public stockholders

What is the GNMA (Ginnie Mae)

The GNMA is a government agency backed by the full faith and credit of the U.S. government

Treasury STRIPS and Treasury receipts are quoted based on _______.

YTM

Are treasury securities sold through auction or negotiation?

auction

Ginnie Mae pass-throughs will pay back both principal and interest_______.

monthly

What entities are a part of the Federal Farm Credit System (FFCS)?

- Federal Land Bank - Federal Intermediate Credit Bank - Bank for Cooperatives

What role does Ginnie Mae have?

- GNMA is a government-owned corporation that approves private lending institutions, such as banks and mortgage companies, to originate eligible loans, pool them into securities, and sell the GNMA mortgage-backed securities to investors. GNMA does not originate loans, and it does not issue or sell securities. -Private lending institutions approved by GNMA originate eligible loans and sell the mortgage-backed securities to investors.

notes on t-notes, t-bills, and t-bonds

- T-bills are sold at a discount and can be purchased in minimum denominations of $100. - The difference between the purchase price and the maturity value is taxed as interest income, not as a capital gain. - Treasury bills are short-term investments maturing in 1 year or less. - T-notes have maturities of 2 to 10 years. T-bonds have maturities of longer than 10 years.

Which of the following statements regarding U.S. government agency obligations are true? I. They are direct obligations of the U.S. government. II. They generally have higher yields than direct U.S. obligations. III. The Federal National Mortgage Association (FNMA) is a publicly traded corporation. IV. Securities issued by the Government National Mortgage Association (GNMA) trade on the NYSE floor. A) I and II B) I and III C) II and III D) II and IV

C) II and III Explanation: U.S. government agency debt is an obligation of the issuing agency. This obligation causes agency debt to trade at slightly higher yields that reflect this greater risk. FNMA securities and GNMA pass-through certificates trade over the counter. GNMA is the only agency whose securities are direct U.S. government obligations.

Which of the following securities is sold at auction? A) Ginnie Maes B) Corporate bonds C) T-bills D) Freddie Macs

C) T-bills Explanation: T-bills, T-notes, and T-bonds are sold through auction. These auctions award securities to the most competitive bids. Agency securities are sold through selling groups appointed by the agency.

Which of the following statements regarding U.S. government agency obligations are true? I. They are direct obligations of the U.S. government. II. They generally have higher yields than direct U.S. obligations. III. The Federal National Mortgage Association (FNMA) is a publicly traded corporation. IV. Securities issued by the Government National Mortgage Association (GNMA) trade on the NYSE floor. A) II and IV B) I and III C) I and II D) II and III

D) II and III Explanation: U.S. government agency debt is an obligation of the issuing agency. This obligation causes agency debt to trade at slightly higher yields that reflect this greater risk. FNMA securities and GNMA pass-through certificates trade over the counter. GNMA is the only agency whose securities are direct U.S. government obligations.

For both U.S. Treasury notes and Ginnie Maes, A) settlement is next business day. B) interest is computed on an actual-day basis. C) interest income is taxed at the federal level only. D) quotes are as a percentage of par in 32nds.

D) quotes are as a percentage of par in 32nds. Explanation: Interest from U.S. T-notes is taxed at the federal level only, while interest on Ginnie Maes is taxed at all levels. GNMA bonds are treated like corporate bonds in many ways. T-notes settle next day, while Ginnie Maes normally settle T+2. Interest on T-notes is computed on an actual-day basis, and Ginnie Mae interest is computed on a 30-day month/360-day year basis. Both Ginnie Maes and T-notes are quoted in 32nds.

What is the FICB?

Federal Intermediate Credit Bank bonds are backed by banks (not the US govt)

When is a note considered a money market instrument?

When the note is within one year of maturity, it is considered a money market instrument.

On what basis do municipal general obligation bonds, industrial development bonds, and municipal revenue bonds pay interest?

semiannually

Ginnie Mae's are....

- quoted in 1/32nds. - traded with an accrued interest computed on an actual-day basis.

Which of the following is not a money market instrument? A) A newly issued Treasury notes issued to meet a specific government funding requirement B) A municipal construction loan note C) A commercial paper issued by a finance corporation of a major automobile manufacturer D) A Federal Farm Credit Bank note maturing in one year

A) A newly issued Treasury notes issued to meet a specific government funding requirement Explanation: A newly issued Treasury note would have a maturity of at least two years and would not be considered a money market instrument at issue.

One of the popular mortgage-back issues are those issued by the Government National Mortgage Association (GNMA). One of the reasons for their popularity is the elimination of A) credit risk. B) prepayment risk. C) interest-rate risk. D) extension risk.

A) credit risk Explanation: Among mortgage-back securities, GNMAs have the unique distinction of direct backing of the government. At least for testing purposes, that eliminates credit risk (the U.S. government cannot go bankrupt). Extension risk is the uncertainly that mortgages will not be paid off as quickly as estimated and prepayment risk is just the opposite. Common to virtually all debt securities is interest-rate risk: as interest rates go up, the price of the security goes down.

If an investor keeps $100,000 invested in U.S. Treasury bills at all times during a 10-year period, she is subject to which of the following? Stable principal Unstable principal Stable interest Unstable interest A) II and IV B) I and III C) I and IV D) II and III

C) I and IV Explanation: Treasury bills are purchased at a discount and mature at face value. This feature provides principal stability to investors who own them. The discount on bills is determined by current market interest rates and fluctuates accordingly.

Investors wishing to protect the fixed-income portion of their portfolios from inflation risk would find which of the following choices most suitable? A) AAA-rated corporate bonds B) Common stock C) Cumulative preferred stock D) TIPS bonds

D) TIPS bonds Explanation: The Treasury Inflation-Protected Securities bonds (TIPS) are designed to do just that. Each six months, the principal amount of the bond adjusts based on changes to the cost of living. The interest and principal on the corporate bonds is fixed, as is the dividend on the preferred stock. Although common stock is generally the choice for inflation protection, the question is referring to the fixed-income portion of the portfolio, not the equity portion.

Ginnie Mae's pay interest on a _______

monthly basis

Interest income from all of the following are exempt from state and local taxation except A) FNMA mortgage-backed issues. B) Treasury bills. C) Series EE savings bonds. D) Treasury bonds.

A) FNMA mortgage-backed issues. Explanation: As a general rule, the interest income from U.S. government and agency securities is subject to federal taxation only; it is generally exempt from state and local taxation. However, the interest income from mortgage-backed securities is fully taxable.

U.S. government securities that let investors hold and trade the individual interest and principal components of eligible Treasury notes and bonds as separate securities are I. clipped bonds. II. stripped bonds. III. subject to annual taxation on the per-year accreted amount. IV. subject to taxation at maturity. A) II and IV B) I and IV C) II and III D) I and III

C) II and III Explanation: U.S. government securities where the interest payments have been stripped from the principal and trade as separate securities are referred to as Treasury STRIPS. These are zero-coupon bonds issued by the U.S. government and are subject to annual taxation on the per-year accreted amount.

Which of the following statements regarding Sallie Mae debentures are true? I. Interest is generally paid monthly. II. Interest is generally paid semiannually. III. Interest is exempt from state and local taxation. IV. Interest is not exempt from state and local taxation. A) I and IV B) I and III C) II and III D) II and IV

C) II and III Explanation: As a general rule, debentures pay interest every six months. Further, interest on nonmortgage-backed government securities is taxable at the federal level and exempt from state and local taxation.

Pass-through securities are issued by all of these except A) the Federal National Mortgage Association. B) Government National Mortgage Association approved issuers. C) the Farm Credit System. D) the Federal Home Loan Mortgage Corporation.

C) The Farm Credit System Explanation: The Farm Credit System (FCS) is a national network of lending institutions that provides agricultural financing and credit. The federal FCS issues discount notes, floating rate bonds, and fixed-rate bonds. The maturities range from one day to 30 years. Unlike the mortgage agencies, these are not pass-through investments.

Which of the following securities is an original issue discount obligation? A) Corporate bonds B) GNMA certificates C) FNMA bonds D) 13-week U.S. Treasury bills

D) 13-week U.S. Treasury bills Explanation: U.S. Treasury bills are always originally issued at a discount and mature at par, with the investor making the appreciation between the original discounted amount and the par value at maturity. However, this appreciation is treated as interest, not a capital gain.

A customer with an income objective who resides in a state with a high personal income tax might find it best to purchase A) U.S. Treasury STRIPS. B) Corporate bonds with an investment-grade rating. C) Mortgage-backed securities issued by the Government National Mortgage Association (GNMA). D) Bonds issued by the U.S. Virgin Islands.

D) Bonds issued by the U.S. Virgin Islands. Explanation: Bond issued by U. S. Territories, such as the Virgin Islands, are triple tax-exempt. That is, investors do not have to pay federal, state, or local income taxes on the interest. GNMA and corporate debt securities are taxable on all levels. Although the Treasury STRIP is exempt from state income tax, as a zero coupon bond, it provides no income.

What is the FCS and what does it issue?

The Farm Credit System (FCS) is a national network of lending institutions that provides agricultural financing and credit. THE FSC issues discount notes, floating rate bonds, and fixed-rate bonds (the maturities rang from one day to 30 years) NOT pass-through investments

Is the Federal Home Loan bank a part of the FFCS?

nope

Does Ginnie Mae originate loans and issue/ sell securities?

nope, just approves of private lending ones

T-bills are quoted

on an annualized discount yield basis, because they do not bear interest

The Treasury Inflation-Protected Securities bonds (TIPS) are designed to....

protect the fixed-income portion of a portfolio form inflation risk