Chapter 10 - U.S. Government and Agency Debt Securities

Question 1

T-Bills are issued in maturities of: ___ week, ___ week, ___ week, and ___ week

Answer 1

T-Bills are issued in maturities of: 4 week, 13 week, 26 week, and 52 week

Question 2

The minimum face value of a T-Bill, T-Note or T-Bond is $_____.

Answer 2

The minimum face value of a T-Bill, T-Note or T-Bond is $100

Question 3

True or False: T-Bills are quoted on a dollar basis.

Answer 3

False.

T-Bills are quoted on a discount yield basis.

Question 4

The following would be a quote for what security? Bid 4.26 Asked 4.22

Answer 4

T-Bill

Question 5

What is the maturity range of a T-Note?

Answer 5

2 to 10 years

Question 6

What is the maturity range of a T-Bond?

Answer 6

More than 10 years

Question 7

Corporate and municipal bonds are quoted in 8ths, while T-Notes and T-Bonds are quoted in ______.

Answer 7

Corporate and municipal bonds are quoted in 8ths, while T-Notes and T-Bonds are quoted in 32nds.

Question 8

Though subject to federal tax, interest on Treasuries is exempt from ________ and ________ tax.

Answer 8

Though subject to federal tax, interest on Treasuries is exempt from state and local tax.

Question 9

Interest on Federal Farm Credit system and FHLB securities is subject to which taxes?

Answer 9

Federal only, and exempt from state and local

Question 10

True or False: Interest paid on GNMA, FNMA, FHLMC, and SLMA agency bonds is fully taxable to investors.

Answer 10

True. The interest is taxed at the federal, state, and local level.

Question 11

What does ownership of a GNMA pass-through certificate represent?

Answer 11

An undivided interest in a pool of residential mortgages

Question 12

How often do GNMA pass-throughs make payments?

Answer 12

GNMA pass-throughs make payments monthly.

Question 13

Each payment from GNMA will represent both ____________ and ____________.

Answer 13

Each payment from GNMA will represent both principal and interest.

Question 14

______ is the mortgage-backed agency that is fully backed by the U.S. Government.

Answer 14

GNMA is the mortgage-backed agency that is fully backed by the U.S. Government.

Question 15

What risk is primarily associated with mortgage-backed securities?

Answer 15

Prepayment risk

Question 16

Is a CMO considered a derivative?

Answer 16

Yes

Question 17

With CMOs, the term ____________ represents separate bond classes.

Answer 17

With CMOs, the term tranche represents separate bond classes.

Question 18

Which tranche has the most predictable cash flow and maturity?

Answer 18

The PAC (Planned Amortization Class) tranche

Question 19

Which tranche has the most unpredictable cash flow and maturity?

Answer 19

The support or companion tranche

Question 20

The tranche that is the last to receive cash flow is the ____________.

Answer 20

The tranche that is the last to receive cash flow is the Z tranche.

Question 21

What are T-STRIPS?

Answer 21

Any T-Note/T-Bond where a BD has stripped the interest and principal payments to sell separately as zero-coupons

Question 22

Since T-STRIPS are sold at a discount and mature at par, what must be done to their basis each year?

Answer 22

The discount must be accreted each year.

Question 23

What are TIPS?

Answer 23

Treasury Inflation-Protected Securities

Question 24

The principal value of TIPS may be adjusted based on changes to the _________.

Answer 24

The principal value of TIPS may be adjusted based on changes to the Consumer Price Index (CPI).

Question 25

True or False: The interest rate on TIPS is fixed, but the principal may be adjusted.

Answer 25

True

Question 26

What system is used for the issuance of Treasury securities?

Answer 26

An auction

Question 27

At a Treasury auction, ________ bids are awarded first.

Answer 27

At a Treasury auction, **non-competitive** bids are awarded first.

Question 28

True or False: The settlement date for T-Bills purchased at the auction is the next business day.

Answer 28

False. Settlement at auction is the Thursday following the auction. Next business day is for secondary market trading.

Question 29

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ following the trade date is settlement for trades of U.S. Government securities or option contracts.

Answer 29

**1 business day (T+1)** following the trade date is settlement for trades of U.S. Government securities or option contracts

Question 30

How is interest on Treasuries treated for tax purposes?

Answer 30

Exempt at the state and local level, but subject to federal tax

Question 31

Interest paid on bonds issued by U.S. territories or possessions is \_\_\_\_\_\_\_\_\_\_\_\_\_\_.

Answer 31

Interest paid on bonds issued by U.S. territories or possessions is **triple-tax-exempt.**

Question 32

What is a major advantage to investing in a bond issued by the Commonwealth of Puerto Rico?

Answer 32

Triple-tax-exempt interest

Question 33

What price do non-competitive bidders agree to pay at a Treasury auction?

Answer 33

The lowest price (highest yield) of the accepted competitive bids

Question 34

A competitive bid placed at a Treasury auction will indicate both ___________ and \_\_\_\_\_\_\_\_\_.

Answer 34

A competitive bid placed at a Treasury auction will indicate both **quantity** and **price**.

Question 35

When must retail communication concerning CMOs be filed with FINRA?

Answer 35

Within 10 business days of first use

Question 36

Name two requirements that must be followed with CMO-related retail communication.

Answer 36

* CMOs may not be compared to other investments (like CDs) * Educational material must be offered

Question 37

Which security has no connection to CMOs - GNMA, FNMA, FHLMC or SLMA?

Answer 37

Student Loan Marketing Association (SLMA) - GNMA, FNMA, and FHLMC are associated.

Question 38

True or False: Agency-backed CMOs have high credit ratings.

Answer 38

True. They are usually highly rated because of the collateral backing them.