Chapter 13 :Federal Government Securities
A customer lives in Massachusetts. He owns $7M of U.S. Treasury Bonds with a 7% coupon. His federal tax bracket rate is 50% and his state tax rate is 10%. What is his total tax liability on the interest received?-$245
$ 70 Annual Interest per bond x 7Bonds (7M = $7,000 principal value of bonds or 7, $1,000 par value bonds) $490 Total Interest Income on all 7 bonds x .50Fed tax rate $245 Tax liability Note: Remember Treasury Bonds are subject to Federal tax but are exempt from state tax, therefore you would use the Federal rate of 50% but you did not use the state tax rate of 10%.
example of gvot bond quoted at 99.24
99pts x $10=990 .24= 24/32 x10 = 7.50 997.50
Which of the following are true regarding Federal Farm Credit System securities:-they issue notes and bonds in book entry form. They settle next business day in Federal Funds.-The bonds are more actively traded in the secondary market than are the notes.
All choices are true except III, since Federal Farm Credit System securities are subject to federal tax.
Which of the following statements is true with regard to overnight repurchase agreements?The interest rate is usually comparable to the federal funds rate. There is minimal interest rate risk. They provide an investment opportunity without price risk. They provide an investment opportunity without loss of liquidity.
All statements are true as stated. The interest rate is usually comparable to the Federal Funds rate and there is minimal interest rate risk since it is generally an overnight loan. Since Repo's are done at a set price there is no price risk. They also provide an investment opportunity for the buyer without loss of liquidity since they are short-term.
Which of the following is true regarding GNMA pass through certificates"?-Payments of interest are subject to state and local taxes.
Distributions from GNMAs are subject to federal, state and local tax.
fed home loan banks are 12 regional cooperative banks that US lending insitions use to finance hosuing and economic development in their communties
FHLB issue notes and bonds whcih are generally non callable, exmept from state tax and issued in book entry form- these issues are considered to be a safe investment
Which of the following issues pass-through securities and purchases conventional residential mortgages from financial institutions?-Freddie Mac
Freddie Mac deals only with "insured" lending institutions.
Which of the following issues pass-through securities and purchases conventional residential mortgages from financial institutions?-Freddie Mac..
Freddie Mac deals only with "insured" lending institutions.
What is covered by the federal government's guarantee of pass-through Ginnie Mae (GNMA) securities?-The federal government's guarantee applies to both the timely payment of interest and the timely repayment of principal on the securities.
GNMA pass-through securities are guaranteed as to the timely payment of principal and interest even if the underlying mortgages are not being paid on time.
An investor owns a 7 1/2% U.S. Treasury bond, due 2015 that is trading @ 101. On a normal interest payment date, the investor would receive:$37.50
The annual interest payment in a U.S. Treasury bond is calculated by multiplying the face amount of the bond (par) by the interest (coupon) rate. Thus, $1,000 par x 7 1/2% coupon = $75 per year. Since interest is paid semiannually, on a normal interest payment date, the bondholder would receive $37.50 (1/2 of $75).
Auctions for U.S. Treasury Securities are conducted by:-Federal Reserve banks
The auctions held to sell U.S. Treasury securities such as T-Bills are performed by Federal Reserve Banks.
ginnie mae are issued in minmium denominations of 1,000
a portion of the monthly payment to the investor is a return of capital and is not taxed but the remaining portion is subject to all taxes,
primary dealers are certain domestic b/d foreign b/d doing business in the US commerical banks
and govt securities trust accts authorized to buy and sell govr securities directly with fed resevere bank
current yield on treasury notes and bonds is indetical to the way it is calculaated on corporate bonds
annual interest/ current market price= current yield
final payment on a tip cannot be less than what the investor orginally paid
appreciation on the princpal value of the tip must be reported annnually and is subject to taxation at the time deported
tips are auctions in july, oct, january
because of the indexing feature tips preserve an investors capital best among all treasury securities
marketability and redeemability tbills
full marketable meaning they can be sold in the seconary market, but are not redeemable until mautiry, they are also not callable prior to matutiry
remeber GGG
ginnie maes are guarnteed by the govt
sallie mae gnerally
have less credit risk than corp debt or muni revenue bonds - issues long term debentures, short term ntoes, notes with floating interest rates
bonds are more activlty traded
in seconary market than the notes
in open market operations the fed desk deals with primary dealers
in the auction the fed desk deals with primary deales and individuals
us treasury securities are subject to
inflationary or purchasing power risk, interest rate risk and market risk
sallie mae does not issue
long term equity antipation notes
t note and bonds are securites where prices are quoted in decimals as a percentage of par in the 32nds
one point = 10, difference between the bid and ask is the spread
regular way settlement for tbillssold at auction is T+3
regular way settlement for tbills traded in seconary makert is T+1
taxation tbills
return or dicount earning on tbills is exempt from state and local income taxes, subject to fed income tax, taxed as interest income to investors and not as cpaital gain
bill charactersitics
sold at a discount in minmium denomination of $100, redeemed at par uopon maturity, the only marketable us govt securities that are always sold at a discount and therefore are not coupon bearing obligations, do not carry fixed rate of interest, tbills do not have reinvestment risk sine tbill do not pay income to investors
indivials notmally purchase treasury recipys for retirmene tplans
such as iras and keoghs that have no current tax liability
dutch auction is a sustem used by the fed reaserve board where the price of newly issued
tbills is gradually lowered untill it meets a responsive bid and sold. all govt securities are handled by the fed reserve through the auction system
in orde to become a primary dealer in us govt seurities
the firm must be recongized as such by the fed resevre open market comittee
example a 20 year tbond is transformed into 40 semi annual interest payments and the finanical principal payments
therefore 41 seperate zero coupon treasury recipts are created
tbills are mainly used by us treasury to finance deficits in the fed budget
they are held in book entry from at fed reasre- this means no certificate, when fed open market comittee is attempting to control the reserve position of commerical banks, they will most frequently buy and sell t bills. long term policy of investing in tbills would result in a stable principal and flucating rate of retrun
tvil maturities normally avaiable for 1 month, 3 month, 5 month or 12 month
they are never issued with matuiryt more than one year , they are auctioned every money and would settle on thursday (T+3), auction of 52 week tbill is monthly
an investor looking for safety of principals and some income
would consider investing in t notes and t bonds
t bonds
10-30 years and may be issued as callable
basis points on 1,000,000 tvills are equal to
100 on 12 month till, 50 on 180 tbill and 25 on a 3 month tbill
Which statement is NOT true of Government National Mortgage Association (GNMA) guaranteed mortgage-backed securities?-Interest on these securities is paid semi-annually.
GNMAs pay interest monthly (not semi-annually) and it is not exempt from any taxes. The yields are generally higher than U.S. Treasury securities and the income received from pay-downs by mortgage holders is treated as a return of principal, not interest, and therefore is tax-exempt. GNMAs are issued in minimum denominations of $1,000 .
As a registered representative you are discussing a potential investment opportunity with a client. The investment pool of the investment opportunity is comprised of government guaranteed mortgages and you tell the client that the investment is government guaranteed. This statement to the client is a--misrepresentation of the investment opportunity.
This statement would be a misrepresentation to the client. Even though the mortgages in the pool are guaranteed, it does NOT mean that the investment itself is guaranteed by the government as this could imply that the RR is stating the performance of the investment is guaranteed. This would be a misleading statement. The government guarantee covers default and interest payments NOT the market performance of the investment.
Which of the following statements are TRUE of U.S. Government agency securities?-The interest paid is subject to federal income taxation
U.S. Government agency securities are debt investments that are not direct obligations of the U.S. Treasury and do not have to be registered with the SEC. Interest paid is subject to federal income taxation.
All of the following statements about U.S. Treasury securities are correct EXCEPT:-They have very little interest rate risk.
While U.S. Treasury securities are not subject to credit risk because they are backed by the full faith and credit of the U.S. Government, they are subject to market and interest rate risk.
government agency and govt sponsorpored issues
are condisdered low risk investments, outstanding issues are available inr egistered form or bearer form with interest coupons attaches, new issues of us treasury and federal agency issues are not available in bearer from, govt agency issues are not direct obligations of the US- they are obligatiosn to the agency themselves
securities issued are not guarnteed by the us govt
bonds are issued at a dicount and pay interest semi annually- interest is fully taxable, bonds are issued either callable or non callable
t bills
direct short term debt obligations of the fed govt and offer investors an extremely liquid investment of the highest quality
various us govt agencies issued debt instruments to provide capital for their operations -
example of this is fed home loan banks, fed farm credit bank, fannie mae, ginnie mae
govt sponsored issues are quoted in 32nds as a percentage pf par value
fed agency issues are considered to be non risk assets for banks by bank regulatory authorities, are exempt from the registration requirement of act of 1933, genrally have higher yields then direct obligation sof us govt
fed farm credit system provices services to farmers and farm related businesses, each fed farm district contains a
fed land bank, fed intermediate credit bank, bank for cooperatives , system sells through b/ds notes at a discount
ginnie mae
govt agency whcih offers investors an undivided interest in a pool of mortagges guarnteed by the us govt, the pass through securities pass through to investors monthly the princpal and interest from mortgage payments made by home owners and those payments are guarnteed by the us govt
notes and bonds are usaully issued in book entry from
interest is exempt from state and local taxes but subject to fed tax, trade in 32nds and settle next business day in fed funds and are not guarnteed by the us govt
TIPs are treasuy notes and bonds where interest and redemption payemnts are indexed on the current inflation rate based on consumer price incex
interest is paid semi- annually at a fixed rate but the fixed rate is applied to the inflation adjusted principal value of the bond and not par
series EE savings bonds are non marketable fed govt debt they are issued at face value with a fixed rate of innterest which is added to the EE bond monthly
interest on series EE bonds is taxable when the bonds are redeemed, offered in denominations of $25 to $10,000 per calender year, registered in the investors name , non marketable, not subject to market flucations, redeemable before mautiry, not elibale to be used as collateral for a loan because they are not marketable
interest and principal payments on stripped bonds are guarnteed by the U.S. treasury and therefore are of the highest quality
interest on treasury recipts is txable annually on accural even though the investor recieve only one payment at mautriy
accured interest on us govt bonds and notes
is completed on the actual number of days in a month up to buy not including settlement date
regular way settlement for us govt securities in the secondary market
is the business day after trade date, payment is normally required in fed funds
characteritics of tnotes bonds and tips
issued in min demoniminations of 100, max purchase per auction is 5 million non comeptitve, fixed rate of interest which is paid semi annualy which is exempt from state and local income tax, bit subject to fed income tax, outstanding issues are avaiavle in registered or bearer from, regular way settlement is t+1 i the secondary makret
fed farm credir system consolidated system wide bonds with
long and short term maturities in 5,000 increments these bonds are not callable
t notes
maturity 2-10 years and are not issued as callable
3 and 6 month tbills are sold at weekly auctions conducted by fed resevre banks
non competiive orders from the public are always filled first at these auctions, indiviudials pay avg price of all competitie bids also called competie tender price, one year t bills sold at monthly auctions
Which of the following carry a fixed interest rate?-Treasury Notes Treasury Bonds
notes & Bonds have a fixed interest rate whereas Bills trade at a discount without a fixed rate.
tips interest is subject to fed tax bit exempt from state and local tax
principal is adjusted to cpi semi annually
freddie mac
publically owned govt sponsored company which trades on the nyse, the pass through securities pass through to investors monthly the principal and interest from conventional mortgage payments made by homeowners, are issued in min denomination of 25,000 and are held in book entry from, interest income to investors is fully taxable at al level
fannie mae
publically owned govt sponsorped company that trades on nyse, buys mortgages from lenders and is the largest source of home mortgage funds for low moderate and middle income home buyers
sallie mae
purchase student loans from qualified lending institions such as colleges, universities, banks and other financial institions, pubically traded company which is backed by these insured loans and trades on the nyse under ticker SLM, bond pay semi annual interest and are quoted in 32nds, interest is subject to fed but wxempt from state and local tax
if a dealer sells treasury securities with an greement to repurchase them a short time later, the agreemnt is know as repurchase agreement
repos have little or no price risk, credit risk and liquidiry risk
STRIPs - seperate trading of registered interest and principal securities, treasury recipts, zero coupon bonds or stripped treasuries
several brokerage firms offer investors the ability to purchase certicates whcih represent a portiton of a truest with tbonds as the underlying security, the trust buys a large quanity of tbonds, strips the coupons and then offers certicates or recipts with varied mauturies to investors
treasury securities are not subject to credit or default risk
since are guarnteed by the us govt
fanni, freddi and ginnie mae are govt agencies or govt sponsored corps that provide financing the housing market
they buy mortgage from lenders, put the mortgages into pools and then offer securities to the publci which are backed by the mortagegs in the pool
treasury reipts are stripped coupon tbonds
they trade a deep discounts which are accreted and taxed annually and are very voltaile, all interest is paid at maturity, purchased are able to locck in a rate of return for predetermined period
Which of the following is a Treasury bill quote?7.20 - 7.00
treasury Bills are quoted at their Discount and therefore show a Bid higher than the Ask.
all govt securities are issued in book entry form
treasury debt is the largest and msot active seconary bond market
tbills are quoted on a discounted yield basis
when looking at quotes on tbills, the bid quote is higher than the ask quote because it is quoted at the amount of the discount from face value
