Chapter 13- Federal Government Securities Flashcards
T-Bills
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
T-Notes
Fixed interest rate
Pays interest semi annually
Sold in denominations of $100
Maturity of 2-10 years
Never callable
T-Bonds
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
T-Bill Taxation
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
When are T-bills auctioned
1m and 2m - auctioned every Thursday
3m and 6m- auctioned every Monday
12m auctioned once a month on Tuesday
T-Bills Settlement
T+3 when traded at auction
All federal securities are T+1 when traded (regular way settelment)
T-Bills ask and bid
bid will be higher then ask since the quote will be showing the discount from par value
1 basis point on a t-bill is equal to…
$100 on a 12 month
$50 on a 6 month
and $25 on a 3 month
What are TIPs
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
Treasury debt is the
Largest and most active bond market
US treasuries are subject to
inflationary risk
interest rate risk (reinvestment risk)
market risk
Not subject to credit or default risk
Treasury bond pricing
Treasury notes and bonds are priced in decimals of 32nds. ie.15.08 is equal to 15 and 8/32
1 point on notes and bonds is…
equal to $10.00
Current yield is…
Annual interest/ current market price = current yield
Who uses treasury notes and bonds
someone looking for safety of principal and some income would use treasury notes and bonds
Agency & sponsored issues
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
Fannie Mae
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
Ginnie Mae (GNMA)
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
Freddie Mac
pass through monthly payments of interest and principal of conventional mortgages
Issued in denominations of $25,000
Interest income is fully taxable
Sallie Mae (SLMA)
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
Federal Farm Credit Systems
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
Stripes are also known as
Treasury Receipts (TRs)
Zero Coupon Bonds
Stripped Treasuries
In the real world they are also referred to as Cats and Tigers
What are STRIPEs
brokerage firms offer the ability for investors to purchase a portion of a trust with treasury securities as the underlying security
STRIPEs are…
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
Series EE bonds
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
