Unit 7 - U.S. Treasury and Government Agency Securities

Which of the following choices lists Treasury bills, Treasury bonds, and Treasury notes in ascending order of maturity? A) Bills, notes, bonds. B) Notes, bills, bonds. C) Bonds, notes, bills. D) Bills, bonds, notes.

The best answer is A. Bills, notes, bonds Treasury bills have a maturity of less than one year, Treasury notes mature in 1 to 10 years, and Treasury bonds mature in 10 years or more.

The function of the Federal National Mortgage Association (FNMA) is to A) purchase FHA-insured, VA-guaranteed, and conventional mortgages. B) issue conventional mortgages. C) guarantee the timely payment of interest and principal on FHA and VA mortgages. D) provide financing for government-assisted housing.

The best answer is A. purchase FHA-insured, VA-guaranteed, and conventional mortgages. The FNMA buys FHA, VA, and conventional mortgages and uses them to back the issuance of debt securities. FNMA currently issues debentures, mortgage-backed securities, and certificates.

An investor interested in monthly interest income should invest in A) corporate bonds. B) Government National Mortgage Associations (GNMAs). C) Treasury bonds. D) utility company stock.

The best answer is B. GNMAs GNMAs pay monthly interest and principal Treasury bonds pay semiannual interest Utility stocks pay quarterly dividends Corporate bonds pay semiannual interest

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

The best answer is C. 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.

The longest initial maturity for U.S. T-bills is A) 13 weeks. B) 2 years. C) 52 weeks. D) 39 weeks.

The best answer is C. 52 weeks As money market instruments, the longest initial maturity of Treasury bills is 52 weeks. Those bills are auctioned once a month. T-bills of shorter maturities are auctioned weekly. The shortest initial maturity is four weeks.

Which of the following is a debt instrument that pays no periodic interest? A) GNMA B) Treasury note C) STRIPS D) Treasury bond

The best answer is C. STRIPS STRIPS are Treasury bonds with the coupons removed. STRIPS do not make regular interest payments. Instead, they are sold at a deep discount and mature at par value.

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

The best answer is D. FNMA mortgage-back issues are not exempt from state and local taxation 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.

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

The best answer is A. $1,037.5 Treasury bonds and T-Notes are quoted in fractions of 32nds. a quote of 103:24 means 103 and 24/32 The math is: 103 = 103 x 10 = 1,030 24/32 = 0.75 x 10 = 7.50 Adding the two results together you get the total: 1,037.5 In fractions, this translates to 103¾ (24/32). That is $1,030 plus ¾ of $10 ($7.50).

Which of the following is a debt instrument that pays no periodic interest? A) STRIPS B) Treasury bond C) Treasury note D) GNMA

The best answer is A. STRIPS STRIPS are Treasury bonds with the coupons removed. STRIPS do not make regular interest payments. Instead, they are sold at a deep discount and mature at par value

All of the following are characteristics of Treasury receipts except A) they are stripped bonds. B) accumulated interest is not subject to federal taxation. C) they are zero-coupon bonds. D) the certificates may represent either the principal or the interest portion of the securities that were deposited with a trustee.

The best answer is B. Treasury recipts are zero-coupon instruments, which are purchased at a discount and mature at face value. Although interest is not paid annually on receipts, investors receive a 1099 original issue discount that reports the amount of interest imputed for that year. This interest must be reports to the IRA as taxable income

Treasury Inflation Protection Securities (TIPS) offer which of the following benefits to an investor? I Semiannual adjustments to principal based on the Consumer Price Index (CPI) II A guarantee of profit upon sale III Interest payments that keep pace with inflation IV Provide investors with an income they can't outlive A) I and II B) I and III C) II and III D) III and IV

The best answer is B. I and III TIPS are issued by the government and designed to offer investors inflation protection by adjusting the principal of the TIPS semiannually based on the CPI. In times of inflation, the interest payments increase, and they decrease during times of deflation. No security guarantees a profit upon sale, and only an annuity can guarantee an income for life.

Your customer wishes to lock in a long-term yield with minimal risk and is not interested in regular income. Which of the following securities should you recommend? A) Corporate A-rated zero-coupon bond B) Treasury STRIPS C) Treasury bill D) Treasury bond

The best answer is B. Treasury STRIPS The Treasury STRIPS is long-term, no-interim income security and has a locked-in yield because it is purchased at a discount from par. The Treasury bill is short term The Treasury bond provides semiannual interest, The corporate zero is riskier than the STRIPS

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 state level only. D) the federal and state level.

The best answer is B. the federal level and exempt at the state level. 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.

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

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

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

The best answer is C. Bonds issued by the US Virgin Islands 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.

Which of the following agency securities has the strongest backing of timely payment of principal and interest? A) FNMA B) FHLMCs C) GNMAs D) Treasury notes

The best answer is C. GNMAs Of the agency securities listed here, the only one that is a direct obligation of the U.S. government is the GNMA. The others are quite safe but are only a moral obligation. Please do not be fooled by the Treasury note - that is not an agency security. This is a perfect example of why it is so important to carefully read the question.

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 III B) I and II C) II and III D) II and IV

The best answer is C. II and III US 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 OTC. GNMA is the only agency whose securities are direct US government obligations

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

The best answer is C. a T-bill 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.

All of the following are true except A) income bonds are required to pay interest only if it is earned. B) corporate bonds are quoted in 1/8ths and as a percentage of par. C) U.S. Treasury bonds are quoted in 32nds and as a percentage of par. D) Treasury bills are quoted in 1/8ths and as a percentage of par.

The best answer is D. U.S. Treasury bills are issued at a discount and are quoted on an annualized return on a discount basis, the return based on the actual amount paid.

A dealer in U.S. government securities quotes a 5-year Treasury note at 89.12-89.16. In dollars, that represents a spread of A) $0.04. B) $4.00. C) $0.125. D) $1.25.

The best answer is D. $1.25 Treasury notes and bonds are quoted in fractions of 32nds. My Way: The math is: 89.12 89 = 89x10 = 890 12 = 12/32 x 10 = 3.75 => 89.12 = 893.75 89.16 89 = 89 x 10 = 890 16 = 16/32 x 10 = 5 => 89.16 = 895 Thus, 895 - 893.75 = 1.25 Kaplan's Way: The spread between the bid and the ask is 4/32nds. In simpler terms, that is 1/8th. Each point is $10.00, so this 1/8th of $10.00 is equal to $1.25.

hich 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

The best answer is D. 13-week US Treasury bills 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.

Ginnie Mae pass-throughs will pay back both principal and interest A) quarterly. B) annually. C) semiannually. D) monthly.

The best answer is D. monthly Ginnie Mae securities are called pass-through certificates because the monthly home mortgage payments, which consist of both principal and interest, pass through to the Ginnie Mae investor monthly.