C3 Government Securities Flashcards
US Government Securities
US government is the largest issuer of debt. It is also the issuer with the least amount of default risk.
The securities are issued by the Treasury Department, and are a legally binding obligation of the federal government.
Interest earned is only taxed at the federal level. It is exempt from state and local taxes.
US Savings Bonds
Series EE Bonds -They are purchased from US government at a discount from Par. Currently 50%. They are zero coupon bonds. They do not make interest payments until they are redeemed. Investors may pay taxes on the interest yearly, or wait until the bond matures. At maturity they can get the face (Par) value of the bond or convert them to Series HH Bonds and continue to Defer the taxes.
Series HH Bonds – May only be purchased by trading in matured Series EE bonds. They cannot be purchased for cash. Unlike Series EE bonds, they pay semi-annual interest. They may be redeemed at any time for face value.
Treasury Bills Notes and Bonds
Purchasing Treasury Bills
Treasury Bills range in maturity from 4 to 52 weeks. The denominations are $100 to $1,000,000. The Treasury has weekly competitive auctions Large banks and brokers, known as primary dealers submit competitive bids (what rate and how many $) for the bonds being sold. The Treasury has a set amount they auction each week. They fill the order from best price to lowest until they run out. The maximum bid amount is $500,000.
They can also enter a Non-Competitive bid and get the bonds at the average price of the competitive bids.
Treasury Strips
Treasury Strips Stands for Separate Trading of Registered Interest and Principal Securities. The Treasury Securities are broken into two separate products. A zero Coupon bond that pays no interest and is sold at a discount of par, and semiannual interest coupons.
Treasury Receipts
Treasury Receipts are the same as STRIPS except they are created by private banks and brokers who own the actual Treasury securities and place them in a trust account.
Treasury Inflation-Protected Securities (TIPS)
Treasury Inflation-Protected Securities (TIPS) offer the investor protection from inflation. They have a fixed interest rate and the principal is adjusted semiannually to reflect changes in the Consumer Price Index (CPI)
During times of inflation, the investors interest payments will increase to match inflation. During times of falling prices, the principal amount of the bond is adjusted down, and he investor will receive lower interest payment
Agency issues
The federal government has authorized certain agencies and quasi-agencies to issue debt securities that are known as agency issues. The bonds are backed by revenues, taxes and fees collected by the agencies. The rates usually fall in between Treasury securities and corporate securities. They are priced like corporate securities as a percentage of Par.
Government National Mortgage Association (GNMA)
Government National Mortgage Association (GNMA) - Also known as Ginnie Mae. It is a wholly owned government corporation (Note: Fannie Mae and Freddie Mac are private), and is the only agency whose securities are backed by the full faith and credit of the US Government.
The purpose of Ginnie Mae is to add liquidity to the mortgage markets. Ginnie Mae buys pools of mortgages that have been insured by the Federal Housing Administration (FHA) and Veterans Affairs (VA). The ownership of these pools is sold to private investors as pass though certificates. Investors receive interest and principal based on their investments. As people pay their mortgages every month, principal and interest portions get passed through to the investors.
Only risk of owning Ginnie Mae securities is the risk of early refinancing.
Interest earned is taxable at all levels, Federal, State and Local. The yield quotes are based on a 12-year prepayment assumption. This is the average amount of time a person has a mortgage before paying it for, or refinancing.
FHLMC = Federal Home Loan Mortgage Corporation = Freddie Mac
FNMA = Federal National Mortgage Association = Fannie Mae
Fannie Mae and Freddie Mac even though they are private companies, they have a credit facility with the US government and are considered “agency issues”
Fannie Mae and Freddie Mac are government-sponsored enterprises, private companies sponsored by the government — in the U.S. home mortgage industry. Though separate companies that compete with one another, they have the same business model, wherein they buy mortgages on the secondary mortgage market, pool those loans together, and then sell them to investors as mortgage-backed securities in the open market. The main difference between Fannie and Freddie comes down to who they buy mortgages from: Fannie Mae mostly buys mortgage loans from commercial banks, while Freddie Mac mostly buys them from smaller banks that are often called “thrift” banks.
Federal Farm Credit System (FFCS)
Federal Farm Credit System (FFCS) is a group of privately owned lenders that provide different types of financing for farmers. The FFCS sells Farm Credit securities to obtain the funds to lend the farmers. The securities are not backed by the US Government. The securities pay interest every six months and are only available in book entry form.
- Federal Land Bank – (mortgages on property)
- Bank of Cooperatives - (Provides money for feed and grain)
- Federal Intermediate Credit Bank - (Provides money for tractors and equipment)
Student Loan Marketing Association (Sallie Mae)
Student Loan Marketing Association (Sallie Mae) provides capital for student loans for college and other higher education. Sallie Mae issues discount notes and floating rate securities (known as floaters) with 6-month securities. Like Fannie Mae, Freddie Mac it is a publicly trading for profit company. Interest paid is subject to federal income taxes, but generally is tax exempt from state income taxes.
