Chapter 13- Federal Government Securities

Question 1

T-Bills

Answer 1

Sold at a discount, the discount is your yield
No coupon and no interest
Short term maturities (1 month, 2m 3m, 6m or 12 m) never more then 1 year
denominations of $100
Extremely Liquid

No Reinvestment Risk

Question 2

T-Notes

Answer 2

Fixed interest rate
Pays interest semi annually
Sold in denominations of $100
Maturity of 2-10 years
Never callable

Question 3

T-Bonds

Answer 3

AKA the long bond
Fixed interest rate
Pays interest semi annually
Sold in denominations of $100
Maturity of 10-30 years
Can no longer be sold as callable

Question 4

T-Bill Taxation

Answer 4

The return or discount is exempt from state and local income taxes
Subject to federal income tax
Taxed as interest income to investor and not as a Capital Gain

Question 5

When are T-bills auctioned

Answer 5

1m and 2m - auctioned every Thursday
3m and 6m- auctioned every Monday
12m auctioned once a month on Tuesday

Question 6

T-Bills Settlement

Answer 6

T+3 when traded at auction

All federal securities are T+1 when traded (regular way settelment)

Question 7

T-Bills ask and bid

Answer 7

bid will be higher then ask since the quote will be showing the discount from par value

Question 8

1 basis point on a t-bill is equal to…

Answer 8

$100 on a 12 month
$50 on a 6 month
and $25 on a 3 month

Question 9

What are TIPs

Answer 9

TIPs are treasury inflation protected securities

payments are indexed to the rate of inflation based on the CPI

Principal is adjusted semi annually

Final payment on a tip can not be less than the amount the investor originally paid

Auctioned 3 times a year, July, October and January

Best at preserving investor’s capital among treasury securities

Question 10

Treasury debt is the

Answer 10

Largest and most active bond market

Question 11

US treasuries are subject to

Answer 11

inflationary risk
interest rate risk (reinvestment risk)
market risk

Not subject to credit or default risk

Question 12

Treasury bond pricing

Answer 12

Treasury notes and bonds are priced in decimals of 32nds. ie.15.08 is equal to 15 and 8/32

Question 13

1 point on notes and bonds is…

Answer 13

equal to $10.00

Question 14

Current yield is…

Answer 14

Annual interest/ current market price = current yield

Question 15

Who uses treasury notes and bonds

Answer 15

someone looking for safety of principal and some income would use treasury notes and bonds

Question 16

Agency & sponsored issues

Answer 16

Not direct obligation of the US government but considered backed by us government

considered low risk

quoted in 32nds

Exempt from registration under 9133 act

Generally higher yield then direct US government securities

Question 17

Fannie Mae

Answer 17

Bonds are issued at a discount and pay interest semi annually

Interest is fully taxable (federal state and local)

Bonds can be either callable or not callable

Question 18

Ginnie Mae (GNMA)

Answer 18

Offers undivided interest in a pool of mortgages that is guaranteed by the US government

Issued in denominations of $1,000

Interest and principal payments are paid monthly

The interest portion of these payments is fully taxable the rest is considered return of capital

Question 19

Freddie Mac

Answer 19

pass through monthly payments of interest and principal of conventional mortgages

Issued in denominations of $25,000

Interest income is fully taxable

Question 20

Sallie Mae (SLMA)

Answer 20

Purchases student loans from qualified lending institutions

Bonds pay semi annual interest in 32nds

Interest is subject to federal tax and exempt from state and local tax

Generally have less risk than corporate debt or municipal revenue bonds

Offers long term debentures, short term notes and notes with floating interest rates

Question 21

Federal Farm Credit Systems

Answer 21

Helps farmers

Each farm district contains: Federal land bank, federal intermediate bank (covers farm operating expenses), and bank for cooperatives

Interest is subject to federal but exempt from state and local tax

Trade in 32nds and settle next day

Not guaranteed by the US government

Bonds are more actively traded in the secondary market then the notes

Question 22

Stripes are also known as

Answer 22

Treasury Receipts (TRs)

Zero Coupon Bonds

Stripped Treasuries

In the real world they are also referred to as Cats and Tigers

Question 23

What are STRIPEs

Answer 23

brokerage firms offer the ability for investors to purchase a portion of a trust with treasury securities as the underlying security

Question 24

STRIPEs are…

Answer 24

Traded at a deep discount and taxed annually
Very volatile
Interest is paid at maturity
Locks in return for a predetermined period
Interest and principal payments are guaranteed by the US government

Question 25

Series EE bonds

Answer 25

Non Marketable
Sold in denominations of $25 - $10,000
Very stable - not subject to market fluctuations
Redeemable prior to maturity but after 1 year
No Loan Colateral