Unit 7 Qbank Qs
A customer purchases 10 8% Treasury notes at 101-16. What is the dollar amount of this purchase? A) $10,812 B) $10,015 C) $10,150 D) $10,116
C) $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 + 1/2 = $1,015; $1,015 × 10 bonds = $10,150.
U.S. government securities that are deposited with a trustee against which certificates are sold representing principal payments only on the securities are clipped bonds. stripped bonds. subject to annual taxation on the per-year accreted amount. subject to taxation at maturity. A) I and III B) II and IV C) II and III D) I and IV
C) II and III U.S. government securities that are deposited with a trustee and against which certificates are sold representing principal payments only on the 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.
All of the following are used to back collateralized mortgage obligations except A) Fannie Mae. B) Ginnie Mae. C) Sallie Mae. D) Freddie Mac.
C) Sallie Mae. Sallie Mae is the Student Loan Marketing Association, which purchases student loans and packages them for the secondary market. The FNMA, GNMA, and FHLMC sell mortgage-backed securities.
The income from all of the following securities is taxable on the federal, state, and local income tax levels except A) GNMA certificates. B) reinvested mutual fund dividends. C) Treasury bonds. D) corporate BBB bonds.
C) Treasury bonds. The interest on U.S. government securities (such as Treasury bonds) is exempt from state and local income taxes but not federal income taxes. Dividends (whether reinvested or not), Ginnie Maes, and corporate bonds of all types and/or ratings are taxable on all levels.
Which of the following securities is an original issue discount obligation? A) FNMA bonds B) GNMA certificates C) Corporate bonds D) 13-week U.S. Treasury bills
D) 13-week U.S. 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.
United States Treasury notes are intermediate length securities. Treasury notes are not issued with maturities of A) 2 years. B) 7 years. C) 5 years. D) 4 years.
D) 4 years. U.S. Treasury notes are issued with maturities of 2, 3, 5, 7, and 10 years.
Which of the following securities can generate phantom income? A) Treasury notes B) Treasury bills C) Treasury bonds D) TIPS bonds
D) TIPS bonds TIPS bonds adjust the principal value each six months based on the inflation rate. If the inflation rate is positive, the value increases. Those increases are reported as income each year even though the investor does not receive the appreciation until the bonds mature (or are sold).
T-bills are quoted A) in 32nds. B) in 16ths. C) as a percentage of par. D) on an annualized discount yield basis.
D) on an annualized discount yield basis.' T-bills do not bear interest. T-bills trade and are quoted on an annualized discount yield basis.
Treasury STRIPS and Treasury receipts are quoted based on A) 0.125 (⅛ of a point in dollars). B) 0.03125 (1/32 of a point in dollars). C) amortization of premiums. D) yield to maturity.
D) yield to maturity. Noninterest-bearing securities, like zeroes, are quoted based on their yield to maturity. They are sold at a discount and mature at par.
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) $1.25. B) $0.125. C) $0.04. D) $4.00.
A) $1.25. Treasury notes and bonds are quoted in fractions of 32nds. 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.
A customer owns 10M of 7% U.S. Treasury bonds. He is in the 28% federal tax bracket and the 10% state tax bracket. What is his annual tax liability on these bonds? A) $196 B) $70 C) $266 D) $98
A) $196 The 10M means $10,000. (Remember your Roman numerals? M equals 1,000). His tax liability is as follows: $1,000 times 7% equals $70 annual interest per bond; $70 times 10 equals $700 annual interest, which is taxable only by the federal government; and $700 times 28% equals a $196 tax liability.
If a customer owns a $10,000 8% U.S. Treasury Bond, and she is in the 28% federal tax bracket and a 2.5% state tax bracket, what amount of tax will she pay on the income received from the bond? A) $224 B) $20 C) $100 D) $80
A) $224 Interest on U.S. Treasury bonds is taxable at the federal level only; $800 of interest taxed at 28% equals $224.
If a customer believes interest rates have peaked, and therefore, wants to buy long-term, fixed-income securities providing semiannual interest payments, you would recommend A) bonds that do not have a call feature. B) Treasury STRIPS. C) puttable bonds. D) premium bonds with low call premiums.
A) bonds that do not have a call feature. The purchase of noncallable bonds provides the investor with a constant flow of semiannual interest income until maturity. Treasury STRIPS do not make regular interest payments.
U.S. Treasury bills are issued for all of the following maturities except A) 26 weeks. B) 39 weeks. C) 13 weeks. D) 4 weeks.
B) 39 weeks. As of the authoring date of this question, Treasury bills are issued for terms of 4, 8, 13, 26, and 52 weeks. The Treasury auctions the 52-week bill every four weeks and the 4-, 8-, 13-, and 26-week bills every week.
Interest income from all of the following are exempt from state and local taxation except A) Treasury bonds. B) FNMA mortgage-backed issues. C) Treasury bills. D) Series EE savings bonds.
B) FNMA mortgage-backed issues. 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.
Which of the following is not part of the Federal Farm Credit System (FFCS)? A) Bank for Cooperatives B) Federal Home Loan Bank C) Federal Land Bank D) Federal Intermediate Credit Bank
B) Federal Home Loan Bank The Federal Land Bank, Bank for Cooperatives, and Federal Intermediate Credit Bank are all parts of the FFCS. The Federal Home Loan Bank is not.
All of the following statements regarding Government National Mortgage Association (GNMA) pass-through securities are true except A) the minimum initial investment is $1,000. B) GNMAs are considered to be the riskiest of the agency issues. C) investors receive a monthly check representing both interest and a return of principal. D) investors own an undivided interest in a pool of mortgages.
B) GNMAs are considered to be the riskiest of the agency issues. GNMA securities, which are backed by the full faith and credit of the U.S. government, are considered to be the safest of the agency issues. As is the case with most agencies, the minimum denomination is $1,000.
Which of the following statements regarding Treasury receipts is not true? A) Treasury receipts are not backed by the faith and credit of the U.S. government. B) Interest income is taxed at maturity. C) Treasury securities held in trust collateralize the receipts. D) Treasury receipts pay interest at maturity.
B) Interest income is taxed at maturity. Unlike Treasury STRIPS, which are issued directly by the U.S. government, Treasury receipts are indirect obligations of the government. Treasury receipts are issued by investment bankers who buy Treasury securities, place them in trust at a bank, and sell separate receipts against the principal and interest payments. Like most zeroes, interest must be accreted and taxed annually even though it is not received until maturity.
Which of the following are a direct obligation of the U.S. government? A) Ginnie Maes B) Treasury receipts C) Fannie Maes D) Government bond mutual funds
A) Ginnie Maes Direct debt is backed in full by the U.S. government. The Government National Mortgage Association is owned by the U.S. government; thus, Ginnie Maes are fully backed. Treasury receipts are zero-coupon bonds based on U.S. government debt instruments but are created and issued by broker-dealers and, as such, are not direct obligations of the U.S. government.
Which of the following statements regarding Treasury bills T-bills are true? The government auctions T-bills at a discount. The difference between the cost of a T-bill and its value at maturity is treated as a capital gain. T-bills have longer maturities than T-notes. The minimum denomination of a T-bill is $100 face amount. A) I and IV B) II and III C) I and III D) II and IV
A) I and IV 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 Treasury bills are true? They are sold in minimum denominations of $10,000. They are offered with maturities ranging up to 52 weeks. Their interest is exempt from taxation at the state level. They are callable by the U.S. Treasury at any time before maturity. A) II and III B) II and IV C) I and II D) I and III
A) II and III Treasury bills are sold in minimum denominations of $100 and are not callable before maturity. T-bills are regularly offered with maturities from four weeks to as long as 52 weeks from issuance and are issued at a discount. Interest on Treasury bills is taxable at the federal level only.
Which of the following statements regarding Ginnie Maes are true? They are quoted in 1/8ths. They are quoted in 1/32nds. They are traded with an accrued interest computed on an actual-day basis. They are traded with an accrued interest computed on a 30/360 basis. A) II and IV B) I and III C) II and III D) I and IV
A) II and IV Like governments, Ginnie Maes are quoted in 1/32nds, but, like corporates, Ginnie Maes compute accrued interest on a 30/360-day basis.
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 invest in a Treasury bill on the basis of its safety. B) 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. C) The registered representative convinced the client to invest in an IPO on the basis of its high-growth prospects. 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.
A) The registered representative convinced the client to invest in a Treasury bill on the basis of its safety. 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.
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) interest-rate risk. C) extension risk. D) prepayment risk.
A) credit risk. 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.
The terminology guaranteed full faith and credit is most applicable to A) interest and principal on a U.S. government-issued bond. B) interest only on a U.S. government-issued bond. C) interest and principal on a municipal revenue bond. D) interest and principal on a corporate bond.
A) interest and principal on a U.S. government-issued bond. Of the choices given, the terminology would be most applicable to both interest and principal on a U.S. government bond. Remember that the U.S. government's guarantee is backed by their authority to tax and print money. While corporate bonds can be backed by the issuer's full faith and credit, the guarantee is only as good as the corporation's ability to pay. Municipal revenue bonds are backed by the expected revenue generated from the project being financed.
If an investor watches the latest T-bill auction fall to 4.71% from 4.82%, the best interpretation is that A) investors who purchased bills at this auction paid more for them than purchasers last week. B) investors who purchased T-bills 12 weeks ago paid less than subsequent purchasers. C) the decline in yields indicates the Federal Reserve Board has raised the discount rate. D) the federal funds rate and other short-term interest rate indicators are probably rising.
A) investors who purchased bills at this auction paid more for them than purchasers last week. The rates on the T-bills fell, so prices rose, and the investor paid more for the bills this week than last week. The decline in yields indicates there was good demand for the securities because the price rose, driving the yields down. The question does not indicate the price of T-bills 12 weeks ago; it is unclear if the investor paid less for the T-bills then. The federal funds rate and other short-term interest rates would decline—not rise—in line with those of T-bills.
All of the following statements regarding Treasury bills are correct except A) most Treasury bill issues are callable. B) Treasury bills are a direct obligation of the U.S. government. C) Treasury bills trade at a discount to par. D) 4-, 13-, and 26-week maturities are typical with the maximum sometimes changing.
A) most Treasury bill issues are callable.
The function of the Federal National Mortgage Association (FNMA) is to A) purchase FHA-insured, VA-guaranteed, and conventional mortgages. B) guarantee the timely payment of interest and principal on FHA and VA mortgages. C) provide financing for government-assisted housing. D) issue conventional mortgages.
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 looking for income with the highest degree of safety would probably choose to purchase A) FNMAs. B) GNMAs. C) SLMAs. D) FHLMCs.
B) GNMAs. All of the choices are U.S. government agencies, but only those issued by the Government National Mortgage Association (GNMA) have the direct backing of the government.
All of the following debt instruments pay interest semiannually except A) industrial development bonds. B) Ginnie Mae pass-through certificates. C) municipal revenue bonds. D) municipal general obligation bonds.
B) Ginnie Mae pass-through certificates. Ginnie Maes pay interest on a monthly basis, not semiannually.
Which of the following statements regarding Sallie Mae debentures are true? Interest is generally paid monthly. Interest is generally paid semiannually. Interest is exempt from state and local taxation. Interest is not exempt from state and local taxation. A) I and III B) II and III C) II and IV D) I and IV
B) II and III 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.
All of the following are characteristics of Treasury receipts except A) the certificates may represent either the principal or the interest portion of the securities that were deposited with a trustee. B) accumulated interest is not subject to federal taxation. C) they are stripped bonds. D) they are zero-coupon bonds.
B) accumulated interest is not subject to federal taxation. Treasury receipts 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 reported to the IRS as taxable income.
A Treasury bond is quoted in The Wall Street Journal as follows: Bid 100:15 Asked 100:17 Bid Chg. -1 Yield 7.9 From this information, you know that the nominal yield is A) less than 7.90%. B) greater than 7.90%. C) 7.90%. D) 7.89%.
B) greater than 7.90%. The Bid and Asked prices show that the Treasury bond is being quoted at a premium (above par), with a yield to maturity of 7.9%. When bonds are trading at a premium, the nominal yield (coupon rate) is greater than the yield to maturity.
For an investor who needs regular income, a GNMA pass-through certificate would be attractive because A) the income is not taxable on the state or local level. B) the investor would receive a monthly check. C) the security has the direct backing of the U.S. government. D) each check is for the same amount.
B) the investor would receive a monthly check. GMNAs pass through the mortgage payments collected on the pool. Because home mortgages are paid monthly, distributions are made to investors monthly. The fact that GNMAs have the ultimate in security—government backing—does not represent a unique benefit for receiving regular income. Treasury bonds or notes have that backing but only pay interest semiannually. The income from a GNMA is taxable at all levels. Because the mortgage payments, which contain principal as well as interest, include mortgage prepayments, the monthly checks will vary.
Freddie Mac does which of the following? Issues pass-through securities Purchases student loans Purchases conventional residential mortgages from financial institutions Issues securities backed directly by the full faith and credit of the U.S. government A) I and IV B) II and IV C) I and III D) II and III
C) I and III Freddie Mac is a publicly owned and traded U.S. government agency that issues pass-through securities based on a pool of conventional residential mortgages purchased from financial institutions. Ginnie Mae is the only U.S. agency that issues securities backed by the full faith and credit of the U.S. government.
Which of the following regarding T-bills are true? T-bills trade at a discount to par. T-bills have maturities of 1 to 10 years. Most T-bill issues are callable. T-bills are a direct obligation of the U.S. government. A) I and III B) II and IV C) I and IV D) II and III
C) I and IV T-bills trade at a discount to par, are six months or less to maturity, and are a direct obligation of the U.S. government. T-bills are also noncallable.
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 III B) II and IV C) I and IV D) I and III
C) I and IV 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) Cumulative preferred stock B) Common stock C) TIPS bonds D) AAA-rated corporate bonds
C) TIPS bonds 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.
Debt instruments put up for auction by the U.S. Treasury that offer intermediate maturities best describes A) anticipation notes. B) Treasury bonds. C) Treasury notes. D) Treasury bills.
C) Treasury notes. Treasury notes are the intermediate maturity (2 to 10 years). Treasury bills are short term (less than one year), anticipation notes are short-term revenue notes, and Treasury bonds are long term (10 years or more).
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.
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.
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) quotes are as a percentage of par in 32nds. D) interest income is taxed at the federal level only.
C) quotes are as a percentage of par in 32nds. 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.
Interest on direct debt issued by the U.S. government is taxable at A) the state level only. B) different levels in different states. C) the federal level and exempt at the state level. D) the federal and state level.
C) 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.
One of your customers would like to purchase a government agency security for the UTMA account of her daughter. The daughter worked in construction over the summer and would like to use $1,275 of her savings for the purchase. Securities issued by which of these agencies could be purchased for this account? A) Federal Farm Credit System B) Federal Home Loan Mortgage Corporation C) Student Loan Marketing Association D) Federal National Mortgage Association
D) Federal National Mortgage Association' Of this group, the only agency that would be able to sell $1,275 of securities is Fannie Mae. Their securities are available with a minimum denomination of $1,000 and then increments of $1. FHLMC also has the $1,000 initial minimum, but with $1,000 increments. The same numbers apply to the FCS, and Sallie Mae's minimum is $10,000. Another agency that would have met the investor's need is GNMA.
Treasury Inflation Protection Securities (TIPS) offer which of the following benefits to an investor? Semiannual adjustments to principal based on the Consumer Price Index (CPI) A guarantee of profit upon sale Interest payments that keep pace with inflation Provide investors with an income they can't outlive A) II and III B) I and II C) III and IV D) I and III
D) 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.
Which of the following statements regarding Government National Mortgage Association (GNMA) securities are true? Interest is subject to federal income tax. Interest is exempt from federal income tax. They are backed by farm mortgages. They are backed by residential mortgages. A) I and III B) II and IV C) II and III D) I and IV
D) I and IV GNMA securities are subject to both state and federal income tax and are backed by residential mortgages.
All of the following issue mortgage-backed securities except A) Freddie Mac. B) Ginnie Mae. C) Fannie Mae. D) Sallie Mae.
D) Sallie Mae. Sallie Mae is the name for the Student Loan Marketing Association, which does not issue mortgage-backed securities. The backing for those is, as the name states, student loans. Ginnie Mae (Government National Mortgage Association), Fannie Mae (Federal National Mortgage Association), and Freddie Mac (Federal Home Loan Mortgage Corporation) do issue mortgage-backed securities as is clearly indicated in their names.
Which of the following securities is sold at auction? A) Freddie Macs B) Ginnie Maes C) Corporate bonds D) T-bills
D) T-bills 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.
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 could be expected 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) ADRs B) U.S. Treasury bills C) GNMAs D) Treasury Inflation Protection Securities (TIPS)
D) Treasury Inflation Protection Securities (TIPS) Provide income, keep pace with inflation, and offer tax relief are the three criteria. 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. None of the remaining choices meet all three.
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) Treasury bill B) Corporate A-rated zero-coupon bond C) Treasury bond D) Treasury STRIPS
D) 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, and the corporate zero is riskier than the STRIPS.
Income from all of the following securities is fully taxable at the federal, state, and local levels except A) Ginnie Maes. B) reinvested mutual fund dividends. C) corporate bonds. D) Treasury bonds.
D) Treasury bonds. Interest on Treasury bonds is not taxed at the state or local level.
