Chapter 13 | Federal Government Securities

*If a dealer sells Treasury securities with an agreement to repurchase them a short time later, the agreement is known as a "________".

*"Repurchase Agreement (Repos)* [13.2]

*T-Bonds* are sometimes referred to as *"____________"*.

*"The Long Bond"* [13.1]

A 7 1/2% U.S. Treasury Bond, due 2030 trading at 101.06 would have a dollar value of: A) $750.00 B) $1,017.50 C) $1,011.88 D) $1,016.00

*$1,011.88* - *Step 1*: 101 = $1,010.00 - *Step 2*: (6/32) x $10 = $1.88 - *Step 3*: $1,010.00 + $1.88 = $1,011.88 Dollar Value [13.2]

*Basis points* on $1,000,000 T-Bills are equal to the following: *______* on a *180-day T-Bill*

*$50* [13.2]

T-Bills are quoted on a discounted yield basis. When looking at quotes on T-Bills, the *______ quote is higher* than the *______ quote* because it is quoted at the amount of the discount from face value.

*Bid ; Ask* [13.2]

*In order to become a Primary Dealer in U.S. Government Securities, the firm must be "recognized" as such by the ___________*.

*Federal Reserve's Open Market Committee (FOMC)* [13.2]

*Three-month (13-week) and six-month (26-week) T-Bills* are sold at *weekly auctions* on ________.

*Mondays* [13.2]

In *______* the *Fed Desk* deals with *"Primary Dealers"*.

*Open Market operations* [13.2]

Which of the following securities would generally be deemed to have the least amount of credit risk? a) Municipal Revenue bonds b) SLMA - Sallie Mae debt securities c) Corporate subordinated debentures d) Income bonds

*SLMA - Sallie Mae debt securities* - When compared to corporate securities (C and D), or Revenue bonds, Sallie Mae would offer the least amount of credit risk. [13.3]

*T-Bills (Treasury Bills)*

- Sold at a *discount* (the discount is the *yield* on the T-Bill) - Do *not pay interest* (therefore, there is *no coupon*) - Have *short-term* maturities (never longer than 12 months) - Issued in minimum denominations of *$100* - Always considered to be *risk-free* investments [13.1]

*Basis points* on $1,000,000 T-Bills are equal to the following: *______* on a *12-month T-Bill*

*$100* [13.2]

*Basis points* on $1,000,000 T-Bills are equal to the following: *______* on a *3-month T-Bill*

*$25* [13.2]

A U.S. Treasury Note is quoted in the paper at 100.24. A customer buys $5,000 Par Value at this price. what principal amount will he pay? A) $5,000.00 B) $5,007.50 C) $5,037.50 D) $5,080.00

*$5,037.50* - Price = 100.24 - *Step 1*: 100 = $1,000 - *Step 2*: 24/32 x $10 = $7.50 - *Step 3*: $1,000 + $7.50 = $1,007.50 price per bond - *Step 4*: $1,007.50 x 5 = $5,037.50 Total Cost [13.2]

Maximum purchase amount per auction of ______ non-competitive for T-Notes, T-Bonds and TIPs.

*$5M* [13.2]

Formula for *Current Yield*

*Annual Interest / Current Market Price = Current Yield* - Note: Current yield on Treasury Notes/Bonds is identical to the way it is calculated on corporate bonds. [13.2]

All government securities are issued in *________* form. Treasury debt is the largest and most active secondary bond market.

*Book Entry* [13.2]

Which of the following statements is generally accurate regarding securities issued by agencies of the U.S. Government? a) Though these securities pay interest, only the principal is considered to be safe and liquid. b) They generally do not trade in the secondary market. c) Both the principal and interest payments are considered to be safe. d) The U.S. Government fully backs the issues of federal agencies.

*Both the principal and interest payments are considered to be safe* - Issues of government agencies are not fully backed by the U.S. Government (but rather, the agencies themselves). - Federal agencies are considered to be safe investments and this is with regards to both the interest and principal. - Also, many agency securities trade in the secondary market. [13.3]

Of the following statements regarding Government National Mortgage Associate (GNMA) securities, which is CORRECT? a) Federal, State, and Local taxes do not apply to these bonds or their interest. b) GNMA securities are issued by a federal agency of the U.S. c) Semi-annual interest is paid on these securities. d) FINRA offers a full faith and credit guarantee with regard to GNMA.

*GNMA securities are issued by a federal agency of the U.S.* - The GNMA is a U.S. Federal Agency. - These bonds are backed by the full faith and credit of the U.S. Government (not FINRA, which is an SRO). - GNMAs pass through principal and interest payments on a monthly basis, and the interest portion is subject to Federal, state and local taxes. [13.3]

The security most like a direct obligation of the U.S. Government is: a) Federal Home Loan Bank Discount Notes b) Federal National Mortgage Association Debentures c) Government National Mortgage Association Pass Through Securities d) Farm Credit Consolidated Systemwide Bonds

*Government National Mortgage Association Pass Through Securities* - Most like a direct obligation of the U.S. Government would be Ginnie Maes (because they are backed by the U.S. Government). [13.3]

Which of the following is true about securities of the Federal Intermediate Credit Bank? a) They trade in 1/8ths and settle regular way. b) Interest is exempt from federal taxes. c) They are as safe as Treasury issues. d) Issues include discount notes and long-term bonds.

*Issues include discount notes and long-term bonds* - Federal Intermediate Credit Bank (F.I.C.B.) issues include discount notes and long-term bonds. - Interest is subject to Federal tax, but exempt from state taxes. - F.I.C.B.'s are not issued or backed by the U.S. Government, so they are not as safe as Treasury issues. - F.I.C.B.'s trade in 32nds and settle next business day in federal funds. [13.3]

*________* are certain domestic broker-dealers, foreign broker-dealers doing business in the U.S., commercial banks and government securities trust accounts authorized to buy and sell government securities (including new issues as well as Open Market Operations).

*Primary Dealers* [13.2]

Securities issued by the Federal Intermediate Credit Banks (FICBs): a) Are direct obligations of the U.S. government b) Pay interest that is exempt from federal income tax c) Provide funds for loans for farm expenses d) Provide funds for residential mortgages

*Provide funds for loans for farm expenses* [13.3]

All of the following are true concerning U.S. Treasury Bonds EXCEPT: a) They are long-term debt obligations of the U.S. Government with maturities over 10 years and are issued in minimum denominations of $100. b) Interest received by investors is exempt from state income taxes but subject to federal income taxes. c) They are traded in 32nds of a point and may trade at a discount or premium from par value. d) They are always traded at a discount from par value, quoted on a yield to maturity basis, and the buyer does not pay accrued interest on the purchase.

*They are always traded at a discount from par value, quoted on a yield to maturity basis, and the buyer does not pay accrued interest on the purchase* - U.S. Treasury Bonds are quoted as a percentage of par, can trade at either a discount or a premium, and the buyer does pay accrued interest on the purchase. - Treasury Bonds can trade at a discount, par or premium. [13.2]

All of the following are true of Government Agency Issues EXCEPT: a) It is possible for them to be issued as registered securities. b) They represent direct obligations of the federal government. c) They may be accompanied by interest coupons. d) They are an investment with a low credit risk.

*They represent direct obligations of the federal government* - Agency issues are not obligations of the Federal government, but are obligations of the agency itself. [13.3]

An investor looking for *safety of principal and some income* would consider investing in __________.

*Treasury Notes and Treasury Bonds* [13.2]

*One-year (52-week) T-Bills* are sold at *monthly auctions* on ________.

*Tuesdays* [13.2]

Interest on all of the following securities is subject to State income tax EXCEPT: a) FNMA debentures b) U.S. Treasury Notes c) Commercial Paper d) Bankers' Acceptances

*U.S. Treasury Notes* [13.2]

A 70-year-old widower investing proceeds of his spouse's life insurance policy for additional needed income should invest in which of the following? a) Small capitalization Stocks b) Common Stock c) U.S. Treasury Securities d) Real Estate Investment Trusts

*U.S. Treasury Securities* - U.S. Treasury securities would provide the income as well as safety (they are guaranteed by the U.S. Government). [13.2]

If a customer sold U.S. Treasury Bonds on Tuesday July 10th, the trade would settle: a) Tuesday, July 10th b) Wednesday, July 11th c) Thursday, July 12th d) Monday, July 16th

*Wednesday, July 11th* - Government bond transactions settle next business day. - Accrued interest is paid up to, but not including, the settlement date. [13.2]

In the *______* the *Fed Desk* deals with *Primary Dealers and individuals*.

*auction* [13.2]

U.S. Treasury Bills are brought to market by which of the following methods? A) auction B) negotiation C) syndicated underwriting D) all-or-none bid

*auction* [13.2]

*T-Bills* are held in *________* at the Federal Reserve or the U.S. Treasury. This means no certificate is available to a purchaser. As evidence of ownership, a purchaser receives a *________* (a receipt).

*book entry form ; book entry advice* [13.2]

A customer buys a long-term 6% Treasury Bond with a yield of 7% and holds it until one year before maturity. When the bond is sold, the short-term rate is 5%. The bond was purchased at a: A) premium and sold at a premium. B) premium and sold at a discount. C) discount and sold at a premium. D) discount and sold at a discount.

*discount and sold at a premium* - The coupon is 6% and that will not change - When the bond was purchased, the yield was 7% (and when the bond was sold, the yield was at 5%). - A coupon of 6% vs a yield of 7% tells us the bond was purchased at a discount. - A coupon of 6% vs a yield of 5% tells us the bond was sold at a premium. [13.2]

A *long-term policy* of investing in Treasury Bills would results in a ______ principal and a ______ rate of return.

*stable ; fluctuating* [13.2]

*Dutch Auction*

- A system used by Federal Reserve Banks where the *price of newly issued T-Bills is gradually lowered until it meets a responsive bid and is sold*. - All government securities are handled by the Federal Reserve through the auction system. [13.2]

*Taxation* of T-Bills

- Exempt from *state and local income taxes* - Subject to *federal income tax* - *Taxed as Interest Income* to investors (*not* as a Capital Gain) [13.2]

*T-Bonds (Treasury Bonds)*

- Sold with *fixed* coupon rates - Pay interest *semi-annually* - Issued in minimum denominations of *$100* - Maturities of *10-30 years* - *Can* be issued as *callable* [13.1]

*T-Notes (Treasury Notes)*

- Sold with *fixed* coupon rates - Pay interest *semi-annually* - Issued in minimum denominations of *$100* - Maturities of *2-10 years* - *Never* issued as callable [13.1]

*TIPs (Treasury Inflation-Protected Securities)*

- Treasury notes and bonds where the interest and redemption payments are *"indexed"* to the current inflation rate based on the Consumer Price Index *(CPI)*. - Interest is paid *semi-annually* at a fixed rate (but the fixed rate is applied to the *inflation-adjusted principal value of the bond*, not par of $1,000). - Interest is *subject to Federal tax* but exempt from state and local tax. - Principal is adjusted to *CPI semi-annually*. - The final payment on a TIP *cannot be less than what the investor originally paid*. - Appreciation on the principal value must be *reported annually* and is subject to taxation at the time reported (phantom income). - TIPs are auctioned in July, October, and January. - *Preserve an investor's capital best among all Treasury securities* (due to the indexing feature). [13.2]

*U.S. Treasury securities* are subject to what types of risk:

1. *Inflationary or Purchasing Power* risk 2. *Interest Rate* risk 3. *Market* risk [13.2]

*Repurchase Agreements (Repos)* have little or none of these types of risk:

1. *Price* risk 2. *Credit* risk 3. *Liquidity* risk [13.2]

Regular Way settlement for T-Bills traded in the *secondary market* is ________.

*T+1* [13.2]

Regular way settlement for *T-Notes, T-Bonds and TIPs* is ______ in the secondary market.

*T+1* [13.2]

Regular Way settlement for T-Bills sold at *auction* is ________.

*T+3* [13.2]

Because of the indexing feature *______ preserve an investor's capital best among all Treasury securities*.

*TIPs* [13.2]

TRUE OR FALSE: *Treasury Bills do not have reinvestment risk* since T-Bills do not pay income to investors.

*TRUE* [13.2]

TRUE OR FALSEL: The interest rate on Repos *is* comparable to the Fed Funds Rate.

*TRUE* [13.2]

All of the following are true of Federal Home Loan Mortgage Corporation (Freddie Mac) bonds EXCEPT: a) The interest income is subject to state income tax. b) They are issued by a U.S. Government agency. c) They are directly backed by the U.S. Government. d) They can be recorded in the Federal Reserve Book Entry System.

*They are directly backed by the U.S. Government* - Federal Home Loan Mortgage bonds are Agency bonds, which means they are issued by a U.S. Government agency. - The interest income is subject to state, local and Federal income tax. - They can be recorded in the Federal Reserve Book Entry System. - They are NOT directly backed by the U.S. Government (but are backed by the Agency). [13.3]

The *one-month (4-week) and two-month (8-week), T-Bills* are auctioned every ________.

*Thursday* [13.2]

*Treasury Securities are NOT subject to ______ or ______ risk* since the securities are guaranteed by the U.S. Government.

*credit or default risk* [13.2]

The settlement date for a regular way U.S. Treasury Note transaction is: A) same day as trade date. B) four business days after trade date. C) two business days after trade date. D) next business day after trade date.

*next business day after trade date* [13.2]

*Accrued Interest* on U.S. Government Bonds & Notes

Accrued Interest is computed on the *actual number of days* in a month (365 days per year), *up to but not including settlement date*. [13.2]

*Pricing* of Government Securities

Treasury Notes and Bonds are securities where prices are quoted in *decimals as a percentage of par in 32nds*. [13.2]

Need to do sections 13.3 & 13.4

get it done!