Chapter 08: U.S. Treasury and Government Agency Debt Flashcards
__________ are considered non-negotiable because they cannot be sold in the secondary market.
Savings bonds are considered non-negotiable because they cannot be sold in the secondary market.
Instead, they may be redeemed only by the U.S. government.
Marketable securities are _____ because investors are able to sell their securities to other investors after they’re issued.
Marketable securities are negotiable because investors are able to sell their securities to other investors after they’re issued.
True or False. Treasuries may be freely transferred after they’re issued.
True
The U.S. government issues securities to finance their operations. The securities may be divided into two major groups.
___________ which includes savings bonds and ____________ which includes treasuries
The U.S. government issues securities to finance their operations. The securities may be divided into two major groups.
non-marketable (non-negotiable), which includes savings bonds and marketable (negotiable), which includes treasuries
Negotiable instruments include the following:
- Treasury bills
- Treasury notes
- Treasury bonds
- Treasury Seperate Trading of Registered Interest and Principal Securities (T-STRIPS)
- Treasury Inflation-Protected Securities (TIPS)
- Treasury Cash Management Bills (CMBs)
Both notes and bonds are currently issued in _______ form which means that an investor never receives the actual paper security.
Both notes and bonds are currently issued in Book-entry form which means that an investor never receives the actual paper security.
___________ suggests that a security is being held in the name of a broker-dealer at a depositary, such as the Depository Trust & Clearing Corporation (DTCC)
street-name holding suggests that a security is being held in the name of a broker-dealer at a depositary, such as the Depository Trust & Clearing Corporation (DTCC)
True or Flase. Government securities are quoted in increments of 1/32 nds of a point, while most other bonds are quoted in increments of 1/8ths of a point.
Ex: a u.s. government bond quoted at 97.08, actually means 97 8/32.
Or 97.25% of par, of $972.50
True
The symbol ___ is an indicator of a Treasury note.
n
For example: Feb 20n refers to a Treasury note that matures in February of 2020
The interest rate on ____ is fixed; however, the principal amount on which that interest is paid may vary based on the change in the Consumer Price Index (CPI)
TIPS
________ are referred to as discount securities or non-interest-bearing securities
T-bills are referred to as discount securities or non-interest-bearing securities
______ are quoted on a discounted yield basis
T-bills are quoted on a discounted yield basis
Maturities of one month (4 weeks), three months (13 weeks), six months (26 weeks), and one year (52 weeks)
Allows investors to compare the yields available on T-bills with the yields available on notes, bonds, and other interest-bearing securities
The bond equivalent yield
- the interest being earned is on the amount invested, not on the face amount.
___________ are backed by Treasury securitied that are owned by the issuing broker-dealer, they’re not directly backed by the U.S. Treasury.
Treasury Receipts are backed by Treasury securitied that are owned by the issuing broker-dealer, they’re not directly backed by the U.S. Treasury.
__________ are backed by the full faith and credit of the US Treasury and are quoted on a yield basis, not as a percentage of their par value.
STRIPS are backed by the full faith and credit of the US Treasury and are quoted on a yield basis, not as a percentage of their par value.
Since both _______ and ________ trade at a discount and are non-interest-bearing, they trade without accrued interest
Since both treasury bills and treasury strips trade at a discount and are non-interest-bearing, they trade without accrued interest
Weekly auctions are currently conducted for the 3 & 6 month T-bills every Monday and for the 4 week T-bills every Tuesday.
The auctions for 12 month T-bills are held on a monthly basis.
NOTE
When Treasury auctions are held, securities firms compete with each other by submitting their bids to buy Treasuries through an automated system.
these bids are called competitive tenders since they specify the price and/or yield at which the firm is willing to buy the Treasuries. If an individual wants to purchase Treasuries, she usually submits a non-competitive tender. Non-competitive bids are filled first; however, the bidders must agree to accept the yield and price as determined by the auction
Non-competitive bidders agree to pay the lowest price of the accepted competitive tenders. Although all non-competitive tenders are accepted (awarded) first, the yield that the investors will receive is determined after the competitive tenders are accepted. Therefore, all purchasers of Treasury securities through this auction process will pay the same price. This single price auction process is referred to as a Dutch auction.
_______________________ are publicly chartered, but privately owned organizations. Congress allowed for their creation to provide low-cost loans for certain segments of the population. The enterprise issues securities through a selling group of dealers with the offering’s proceeds provided to a bank (or other lender). The bank then lends the money to an individual who is seeking financing (e.g., students, homeowners, or farmers).
- have implicit guarantee from the U.S. Government
- considered to have minimal default risk
Government-sponsored enterprises (GSEs) are publicly chartered, but privately owned organizations. Congress allowed for their creation to provide low-cost loans for certain segments of the population. The enterprise issues securities through a selling group of dealers with the offering’s proceeds provided to a bank (or other lender). The bank then lends the money to an individual who is seeking financing (e.g., students, homeowners, or farmers).
__________ are debt instruments that are secured by pools of home mortgages. The agencies that issue these securities include the _____________, ________________, ________________.
mortgage-backed securities are debt instruments that are secured by pools of home mortgages. The agencies that issue these securities include the Government National Mortgage Association (GNMA or Ginnie Mae), the Federal National Mortgage Association (FNMA or Fannie Mae), and the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac).
are created when financial institutions, such as banks or mortgage lenders, pool together individual residential mortgages into a single investment vehicle. These mortgages share similar characteristics, like interest rate, maturity, and credit quality.
- “pass through” the principal and interest payments from the underlying mortgage pool directly to investors
-issuer of the ______ collects these payments from borrowers, takes a servicing fee, and distributes the remaining funds to investors every month - Since homeowners can pay off their mortgages early, investors face prepayment risk.
- investors may sell them to other investors in the secondary market
mortgage-backed pass-through certificates
_____ will purchase residential mortgages from savings institutions to provide liquidity.
- raises money by issuing mortgage-backed securities, pass-through certificates, and guaranteed mortgage-backed certificates.
- not backed by the U.S. gov, instead, they’re backed by other agencies and the mortgages that are purchased
The Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac.
guarantees MBS that are backed by mortgages insured or guaranteed by federal agencies, such as the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), United States Department of Agriculture (USDA), and Office of Public and Indian Housing (PIH). These loans often cater to borrowers who may not qualify for conventional mortgages.
- is a fully-owned government corporation, and its guarantees are explicitly backed by the full faith and credit of the U.S. government.
- This means that _____ MBSs carry minimal credit risk, making them attractive to investors.
- any interest earned is subject to federal, state, and local taxes
The Government National Mortgage Association (GNMA), commonly known as Ginnie Mae
_________ refers to the possibility that the issuer or borrowers will repay the principal of a bond or loan before its maturity date. This can result in investors receiving their principal investment back sooner than expected, which can affect their overall return on investment.
- is typically higher when interest rates are falling, as borrowers tend to refinance or pay off their existing loans to take advantage of lower rates.
Prepayment risk
