U.S. Government Securities Underwritings

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An investor wishes to buy a new issue of U.S. Government agency bonds. You recommend that the customer purchase Federal Farm Credit System bonds with a 10 year maturity. An investor who purchases the new issue can expect to pay: A. par value B. par value less a discount C. par value plus a mark-up D. par value plus a commission

The best answer is A. New issues of agency securities are sold through a selling group that is appointed by the Agency. The group typically consists of large banks and broker-dealers. The group sells the issue at par to the public. Out of the proceeds, a selling concession is paid to the selling group by the agency. In contrast, direct U.S. Government obligations are sold through auction.

An investor wishes to buy a new issue of U.S. Government agency bonds. You recommend that the customer purchase Federal Home Loan Bank bonds with a 20 year maturity. An investor who purchases the new issue of Federal Home Loan Bank bonds can expect to pay: A. par B. par plus a mark-up C. discount D. discount plus a mark-up

The best answer is A. New issues of agency securities are sold through a selling group that is appointed by the Agency. The group typically consists of large banks and broker-dealers. The group sells the issue at par to the public. Out of the proceeds, a selling concession is paid to the selling group by the agency. In contrast, direct U.S. Government obligations are sold through auction.

A primary dealer buys Treasury Securities in a competitive bid at the weekly Treasury Auction. Settlement between the dealer and the Treasury occurs: A. on issue date B. the next business day after issue date C. the next business day after the auction D. 5 business days after issue date

The best answer is A. Primary U.S. Government dealers are obligated to bid in the weekly Treasury Auctions. The auctions are conducted each Monday and Tuesday. The issue date of the securities set at the following Thursday. If a primary dealer wins the bid, settlement is made with the Treasury on issue date - that is Thursday.

In the weekly auction of Treasury Bills, which orders are always filled? A. Competitive bids B. Non-Competitive Bid C. Bids from primary dealers D. Negotiated bids

The best answer is B. In the weekly T-Bill auction, the amount of non-competitive bids is set aside from the total securities to be auctioned and is filled at the average winning rate. The remaining T-Bills to be auctioned are filled from the lowest interest rate bid on up. Once the issue is "sold out," all of the winning bidders are filled at the highest interest rate bid that completed the sale (so all winning bidders get the same interest rate - this is a "Dutch Auction"). Once the issue is "sold out," the remaining higher rate bids are void.

Which of the following statements are TRUE regarding new issue government and new issue agency securities? I Agency securities are sold through a selling group II Agency securities are sold through auction III Direct U.S. government obligations are sold through a selling group IV Direct U.S. government obligations are sold through auction A. I and III B. I and IV C. II and III D. II and IV

The best answer is B. New issues of agency securities are sold through a selling group that is appointed by the Agency. The group typically consists of large banks and broker-dealers. Out of the proceeds, a selling concession is paid to the selling group by the agency. Direct U.S. Government obligations are sold through auction.

The Federal Reserve conducts Treasury Bill auctions: A. Daily B. Weekly C. Quarterly D. Annually

The best answer is B. The Federal Reserve conducts weekly auctions for 4, 13, and 26 week T-Bills and monthly auctions for 52 week T-Bills. The auction takes place on either Monday or Tuesday. The T-Bills are issued to the winning bidders and must be paid for on the Thursday immediately following the auction date.

Which statements are TRUE regarding bids placed at the Treasury Auction? I Competitive Bids are always filled II Competitive Bids are not always filled III Only the lowest interest rate bids are filled IV Only the highest interest rate bids are filled A. I and III B. I and IV C. II and III D. II and IV

The best answer is C. At the weekly Treasury auction, non-competitive bids are always filled at the average winning yields of the competitive bids. Only the lowest interest rate competitive bids are filled; the higher rate competitive bids that exceed the amount of securities up for auction that week are rejected.

In the weekly auction of Treasury Bills, which of the following statements are TRUE? I Competitive bids are always filled II Non-competitive bids are always filled III The Federal Reserve allocates securities from the lowest yields to the higher yields IV The Federal Reserve allocates securities from the highest yield to the lower yields A. I and III B. I and IV C. II and III D. II and IV

The best answer is C. In the weekly T-Bill auction, the amount of non-competitive bids is set aside from the total securities to be auctioned and is filled at the average winning rate. The remaining T-Bills to be auctioned are filled from the lowest interest rate bid on up. Once the issue is "sold out," all of the winning bidders are filled at the highest interest rate bid that completed the sale (so all winning bidders get the same interest rate - this is a "Dutch Auction"). The remaining higher rate competitive bids are void.

Which of the following statements are TRUE? I New issues of Treasury Bills are generally priced at par II New issues of Treasury Bonds are generally priced at par, or at a slight discount to par III New issues of Agency Bonds are generally priced at par, or at a slight discount to par A. I only B. III only C. II and III only D. I, II, III

The best answer is C. New issues of T-Bills are always sold at a discount to par value. These are original issue discount obligations, with the accretion of the discount being the interest income earned on these securities. Treasury Bonds and Agency Bonds are issued at par (or at a very slight discount to par), and make periodic interest payments.

Payment for U.S. Government securities that are sold through auction is made on: A. Auction Date B. Auction Date + 1 C. Issue Date D. Issue Date + 1

The best answer is C. Payment for U.S. Government securities that are won at auction must be made on issue date (Thursday of the auction week for T-Bills and the 15th of the month for STRIPS, TIPS, Treasury Notes, and Treasury Bonds). Payment is to be made in cash, Federal Funds, or in similar maturing Government securities (effecting a direct "rollover" of that debt).

New U.S. Government agency securities are: I underwritten via competitive bid II underwritten via negotiated offering III offered through the Federal Reserve IV offered through selling groups A. I and III B. I and IV C. II and III D. II and IV

The best answer is D. Government agency securities are underwritten via negotiated offerings; not via competitive bid as is the case with U.S. Government issues. The agency assembles a selling group through which it offers the securities. It negotiates both the interest rate placed on the issue based upon the level of pre-sale orders received by the selling group; and the selling concession paid to the selling group for offering the securities to the public.

Which of the following are primary purchasers of Treasury securities? I Investment companies II Broker-dealers III Unit Investment Trusts IV Commercial banks A. I and II only B. III and IV only C. I and III only D. I, II, III, IV

The best answer is D. Investment companies such as government bond mutual funds, money market funds and unit investment trusts bid at auction to buy large blocks of Treasury securities directly, bypassing a dealer or broker and therefore saving commissions or markups. Commercial banks and broker-dealers that are primary dealers bid at Treasury auctions to buy securities for their inventories.


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