Series 7 Unit 7 CP

One of the ways in which U.S. government agency issues differ from those offered directly by the U.S. Treasury is that A) agency issues typically carry higher returns than Treasury issues because of the lack of direct government backing. B) agency issues are taxable on the federal level, while Treasury issues are not. C) agency issues are more likely to be issued in larger amounts. D) agency issues frequently trade on the NYSE, while Treasuries never do.

A) agency issues typically carry higher returns than Treasury issues because of the lack of direct government backing. Agencies, with very few exceptions (GNMA being one), do not carry the direct backing of the U.S. Treasury. While they are quite safe, that lack of direct backing causes their yields to be somewhat higher. Agencies are never traded on the stock exchanges, and their float is almost always smaller than Treasuries. Both are taxable on the federal level.

Government agency bonds issued by which of the following carry a minimum denomination of $1,000 with $1 increments? A) Freddie Mac B) Ginnie Mae C) Sallie Mae D) Federal Home Loan Bank

B) Ginnie Mae GNMA securities are available with a minimum denomination of $1,000 and in increments of $1.00. That means, for example, that a client can purchase one for $1,003.00 or $1,337.00 if desired. The only other agency with that type of pricing is the FNMA.

Which of the following securities has the direct backing of the U.S. Treasury? A) Treasury stock B) Ginnie Maes C) Fannie Maes D) Freddie Macs

B) Ginnie Maes Securities issued by the Government National Mortgage Association (GNMA) are the only agency security with the direct backing of the U.S. Treasury. Other agencies are not directly backed. Treasury stock is a corporate issue and has nothing to do with the U.S. Treasury.

A customer, currently finding the income offered from a money market fund quite low, asks if there might be any debt instruments providing income that one could expect to at least keep pace with inflation as well as offer some tax relief. What suitable recommendation could be made that meets the investor's investment objectives? A) GNMAs B) TIPS C) Participating preferred D) U.S. T-bills

B) TIPS The investor has requested a debt security that can meet three criteria: provide income, keep pace with inflation, and offer tax relief. Treasury Inflation Protection Securities (TIPS) are specifically designed to provide income that keeps pace with inflation. In addition, the interest is tax exempt at the state and local level, providing some tax relief. GMNAs will provide income, but they are fully taxable on a state and federal level and offer no inflation protection. T-bills provide income that is probably lower than the money market fund the investor was unhappy with, and participating preferred stock is not a debt security.

All of the following statements regarding the Federal National Mortgage Association (FNMA) are true except A) interest on FNMA certificates is taxable at all levels. B) FNMA pass-through certificates are not guaranteed by the U.S. government. C) FNMA is owned by the U.S. government. D) FNMA is a publicly held corporation.

C) FNMA is owned by the U.S. government. FNMA is a publicly held corporation; it is not owned by the federal government. The interest income on all mortgage-backed securities is fully taxable on the local, state, and federal levels. Though FNMA is a government agency, FNMA pass-through certificates are not guaranteed by the U.S. government. The only tested U.S. agency whose securities are considered direct obligations of the U.S. government is the Government National Mortgage Association (GNMA).

Which of the following securities is frequently offered with a 50-year maturity? A) GNMA pass-through B) Federal Home Loan Bank C) TVA bonds D) U.S. Treasury bond

C) TVA bonds Tennessee Valley Authority bonds are the only government security available today with a maturity as long as 50 years. Most of the agencies don't offer anything longer than 20 years, and the maximum on Treasury bonds is usually 30 years.

A customer purchases ten 8% Treasury notes at 101-16. What is the dollar amount of this purchase? A) $10,812 B) $10,015 C) $10,116 D) $10,150

D) $10,150 Though the denomination of the T-notes purchased is not given, always assume par ($1,000) unless told differently in the question. Remember that government notes and bonds are quoted in 32nds. Therefore, a quote of 101-16 means 101 plus 16/32. 101 plus 1/2 = $1,015; $1,015 × 10 bonds = $10,150.

A registered representative calls a dealer for a quote and is given the following quote: Maturity 5/28/2019 Bid 2.273 Asked 2.263 Chg. 0.015 Asked yield 2.301 What type of security did the registered representative ask for? A) An exchange-traded note B) A municipal note C) A Treasury note D) A Treasury bill

D) A Treasury bill This represents a quote for a T-bill. The quote represents a percentage discount from 100%. It is easy to identify because it looks like the bid price is greater than the ask price. This is the only quote you will see on the Series 7 that looks like this. If you subtract 0.02273 % from 100%, the result is 99.97727% of par, and if you subtract 0.02263% from 100%, the result is 99.97737%. Therefore, the quote is bid $999.7727, ask $999.7737. Note that the ask price is slightly higher. For the exam, it is only important to identify the quote as a T-bill quote; you do not need to do the calculation.

Your client lives in a state with a personal income tax. To minimize that tax liability, it would probably be best for this client to purchase A) Freddie Macs. B) FNMAs. C) GNMAs. D) U.S. Treasury bonds

D) U.S. Treasury bonds. With few exceptions, securities issued by the U.S. Treasury are the only government securities carrying an exemption from state income tax. They are, however, taxable on the federal level. The other choices here are taxed at the local, state, and federal levels.

High-tax-bracket investors are likely to receive the most favorable tax treatment from investing in A) preferred stock. B) GNMA pass-through securities. C) bonds issued by the U.S. Treasury. D) municipal bonds issued by a political subdivision of their state.

D) municipal bonds issued by a political subdivision of their state. Municipal bonds issued by a political subdivision of the investor's state are free of federal, state, and local income taxes. Treasury securities are taxed on the federal level, but not the state and local levels. GNMAs are taxed at every level. Qualifying dividends on preferred stock are taxed on all levels, although generally at a rate not exceeding 20%.

One respect in which TIPS bonds differ from all other U.S. Treasury securities issued at par value is that they A) are quoted in 1/8 increments. B) have a variable coupon rate. C) pay interest annually. D) subject the investor to phantom income.

D) subject the investor to phantom income. The inflation protection of a TIPS bond comes from the semiannual adjustment to the principal value. Those increases are reported to the IRS as ordinary income to the investor. It is called phantom income because the investor does not "see" that money currently, but still must pay taxes on it. Like other Treasuries issued at par (T-notes and T-bonds), interest is paid semiannually at the fixed coupon rate. The actual interest will vary based on the principal adjustment, but the coupon is fixed. As with the other two mentioned, quotes are in 32nds.