S7 CH6 - U.S. Treasury and Government Agency Securities

Which of the following is not part of the Federal Farm Credit System (FFCS)? A) Federal Home Loan Bank B) Bank for Cooperatives C) Federal Intermediate Credit Bank D) Federal Land Bank

A) Federal Home Loan Bank

One of the ways in which U.S. government agency issues differ from those offered directly by the U.S. Treasury is that A) agency issues typically carry higher returns than Treasury issues because of the lack of direct government backing. B) agency issues are taxable on the federal level, while Treasury issues are not. C) agency issues are more likely to be issued in larger amounts. D) agency issues frequently trade on the NYSE, while Treasuries never do.

A) agency issues typically carry higher returns than Treasury issues because of the lack of direct government backing. Agencies, with very few exceptions (GNMA being one), do not carry the direct backing of the U.S. Treasury. While they are quite safe, that lack of direct backing causes their yields to be somewhat higher. Agencies are never traded on the stock exchanges, and their float is almost always smaller than Treasuries. Both are taxable on the federal level.

One respect in which TIPS bonds differ from all other U.S. Treasury securities issued at par value is that they A) subject the investor to phantom income. B) have a variable coupon rate. C) are quoted in 1/8 increments. D) pay interest annually.

A) subject the investor to phantom income. The inflation protection of a TIPS bond comes from the semiannual adjustment to the principal value. Those increases are reported to the IRS as ordinary income to the investor. It is called phantom income because the investor does not see that money currently but still must pay taxes on it. Like other Treasuries issued at par (T-notes and T-bonds), interest is paid semiannually at the fixed coupon rate. The actual interest will vary based on the principal adjustment, but the coupon is fixed. As with the other two mentioned, quotes are in 32nds.

Pass-through securities are issued by all of these except A) the Farm Credit System. B) Government National Mortgage Association approved issuers. C) the Federal Home Loan Mortgage Corporation. D) the Federal National Mortgage Association.

A) the Farm Credit System.

Which statement regarding U.S. government agency obligations is true? A) They are all direct obligations of the U.S. government. B) They generally have higher yields than yields of Treasury securities. C) The FNMA interest is taxed only at the federal level. D) Securities issued by GNMA trade on the NYSE floor.

Answer: B U.S. government agency debt is an obligation of the issuing agency, not the U.S. government. The only exception to that is the GNMA. This causes agency debt to trade at higher yields, reflecting this greater risk. Interest on FNMA securities is taxed at all levels, and no Treasury security trades on the NYSE.

An investor purchasing a seven-year Treasury note at a price of 101.20 would be paying A. $101.20. B. $1,006.25. C. $1,012.00. D. $1,016.25.

Answer: D A quote of 101.20 on a Treasury note means 101 20/32. That is equal to 101 5/8. The math is: 101 = $1,010 and 5/8 = 5 × $1.25 = $6.25 Total is $1,010 + $6.25 = $1,016.25

A risk-averse client wishes the safety of a U.S treasury-backed security but is concerned about the effects of inflation on the value of the dollar. Which of the following would be most appropriate for this investor? A. Treasury bills B. Treasury notes C. Treasury bonds D. TIPS

Answer: D The IP in TIPS stands for inflation protected. These are the only Treasury securities where the value at maturity can be higher than the original investment if there is inflation.

A customer purchases ten 8% Treasury notes at 101-16. What is the dollar amount of this purchase? A) $10,812 B) $10,150 C) $10,116 D) $10,015

B) $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 plus 1/2 = $1,015; $1,015 × 10 bonds = $10,150.

Certain affluent customers of the firm have a principal address in a state with a high state income tax for wages at or above $200,000 adjusted per year. There is also a local tax. Those clients, whose annual wages place them in the highest state and local tax brackets, are looking to invest in a security that minimizes those taxes. Which of the following would most likely meet those customers' search? A) A municipal bond issued by a neighboring state B) A U.S. Treasury bond C) An FHLMC (Freddie Mac) bond D) A GNMA pass-through certificate

B) A U.S. Treasury bond One of the tax features of U.S. Treasury securities is that they are not taxed at the state or local level. GNMA and FHLMC are. Municipal bonds issued by states other than the one of residence are often taxable on the state and local level.

Income from all of the following securities is fully taxable at the federal, state, and local levels except A) reinvested mutual fund dividends. B) Treasury bonds. C) corporate bonds. D) Ginnie Maes.

B) Treasury bonds.

A customer calls you and excitedly tells you that she just had her first child. She says her mother-in-law gifted $20,000 to them in honor of the birth. She wants to invest it to have funds available for the child's higher education in 18 years. She wants assurance that the principal will grow, regardless of market conditions. Which of the following would be the most appropriate recommendation? A) AAA-rated municipal bonds maturing in 18 years B) U.S. Treasury STRIPS maturing in 18 years C) U.S. Treasury bonds with 18 years to maturity date D) Blue-chip stocks

B) U.S. Treasury STRIPS maturing in 18 years

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

B) 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 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) they are zero-coupon bonds. C) accumulated interest is not subject to federal taxation. D) they are stripped bonds.

C) 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 client interested in Treasury bills (T-bills) asks you to explain their features. Which of these is correct? A) They are generally callable after the first 6 months. B) They are all auctioned on a monthly basis. C) They have a maximum maturity of 365 days. D) They are quoted with a bid higher than the ask.

D) They are quoted with a bid higher than the ask. T-bills pay no interest; they are issued at a discount and are direct obligations of the U.S. government. They are not callable and have maximum maturities of 52 weeks (not 365 days) or less. Most T-bills are auctioned weekly.

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

D) Treasury bills are quoted in 1/8ths and as a percentage of par. 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.

Your client lives in a state with a personal income tax. To minimize that tax liability, it would probably be best for this client to purchase A) GNMAs. B) Freddie Macs. C) FNMAs. D) U.S. Treasury bonds.

D) U.S. Treasury bonds. With few exceptions, securities issued by the U.S. Treasury are the only government securities carrying an exemption from state income tax. They are, however, taxable on the federal level. The other choices here are taxed at the local, state, and federal levels.

High-tax-bracket investors are likely to receive the most favorable tax treatment from investing in A) bonds issued by the U.S. Treasury. B) GNMA pass-through securities. C) preferred stock. D) municipal bonds issued by a political subdivision of their state.

D) municipal bonds issued by a political subdivision of their state. Municipal bonds issued by a political subdivision of the investor's state are free of federal, state, and local income taxes. Treasury securities are taxed on the federal level, but not the state and local levels. GNMAs are taxed at every level. Qualifying dividends on preferred stock are taxed on all levels, although generally at a rate not exceeding 20%.

Which are the only agency securities backed by the full faith and credit of the federal government? Government National Mortgage Association (GNMA or Ginnie Mae) Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac) Federal National Mortgage Association (FNMA or Fannie Mae) Student Loan Marketing Association (SLMA or Sallie Mae)

Ginnie Maes Government National Mortgage Association (GNMA)

In general, the interest that government securities pays is exempt from ______ and _______ taxation but is subject to _______ taxation.

In general, the interest that government securities pays is exempt from state and municipal taxation but is subject to federal taxation.

Difference between STRIPS and Treasury receipts?

STRIPS are backed in full by the U.S. government. Treasury receipts are not.

What type of securities are considered the sovereign debt of the United States?

Treasury securities

What is considered the safest investment a U.S. investor can own?

debt issues by the United States Treasury