Debt: U.S. Government Debt Flashcards
Debt: U.S. Government Debt
CHARACTERISTICS OF U.S. GOVERNMENT DEBT
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-Largest Debt Market
1) Why does the U.S. Government issues debt 2) the largest and most active trading market in the world? 2.1) how much debt is outstanding [federal deficit] 3) government debt comes in what form [3] 5) do savings bonds roll up to this, and why
- U.S. Government Securities Are Exempt From The Securities Acts
6) are exempt from what regulations 7) who has oversight of government debt
1) finance the running of the government
2) Yes
2. 1))$22 trillion
3) long-term bonds, intermediate-term notes, and short-term notes, known as Treasury Bills.
5) no, they are non-negotiable and cannot be traded
6) Securities Act of 1933 and the Securities Exchange Act of 1934.
7) Federal Reserve
Debt: U.S. Government Debt
CHARACTERISTICS OF U.S. GOVERNMENT DEBT
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-New Issues - Book Entry
1) Because no certificates are issued for U.S. Debt the transfer agent keeps track of what
- T-Bill - Weekly Auction / All Other Treasury Debt - Monthly Auction
2) who conducts the auctions of government debt 3) what is the largest debt type issued [amount] 4)amount of debt for sale at each auction depends on what 4.1) when is it the lowest
1) “book” of owners
2) Federal Reserve
3) Treasury Bills
4) financing needs to the government
4. 1) after 4/15 tax day
Debt: U.S. Government Debt
CHARACTERISTICS OF U.S. GOVERNMENT DEBT
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-Agency Debt Highest Rating
1) Debt also issued by agencies of the U.S. Government? 2) Most agency debt [debt that starts with “federal”- example federal home loan bank] backed directly by the Government’s promise to pay? 2.1) instead the government does what 3) what is one agency debt directly backed by the government
- Direct Treasury Debt Highest Rating
4) U.S. Government debt is considered to be the highest rated debt? 5)free of what risk 6)Agency debt is also highly rated (AAA) but considered less safe than the direct debt?
1) Yes 2) no
2. 1) there is an implicit promise on the part of the government to pay if the debt default
3) GNMA Government National Mortgage Association
4) yes
5) credit risk
6) yes
Debt: U.S. Government Debt
U.S. GOVERNMENT OBLIGATIONS
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-Treasury Bonds / 30 Year Maturity / Quoted In 32nds
1) Long-term securities issued with maturities of 30 years. The bonds are issued in minimum denominations and interest paid when 2) are any other bonds that have such a low amount? 3) Treasury bonds are quoted as a percentage of par? 4) Long-term Treasury bonds callable
1) $100, paid semi-annually 2) no 3) yes 4) no
Debt: U.S. Government Debt
U.S. GOVERNMENT OBLIGATIONS
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-STRIPS
1) What does STRIPS stand for 2) Why referred to “strips” 3) if you’re not getting semiannual interest, what do you get 4) This investment is designed for pension fund managers who want a safe, long term investment, why?
1) separate trading of registered interest and principal of securities 2) zero-coupon treasury bond strips off the coupons form the bond, leaving the final principal payment that will occur years into the future 3) you purchase the bond at a discount and at the end of maturity you get the par value [e.g., $1k] 4) it does not receive semiannual interest, no reinvestment risk if market interest rates fall during this period [not investing interest when rates are low]
Debt: U.S. Government Debt
U.S. GOVERNMENT OBLIGATIONS
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-STRIPS/ Treasury receipts
1) before Treasury first started selling STRIPS in 1986, brokers created a zero-coupon Treasury bond and called it what? 2)were they non-exempt securities 3) subject to reinvestment risk 4)subject to large liquidity risk compared to government securities? 4.1) having said that, will dealers buy them back 5) what are they rated 6) subject to volatile price swings? 6.1) why does price volatility not really matter 7) Are they around anymore 7.1) what replaced them
1) treasury receipts
2) yes
3) no
4) yes
4. 1) yes
5) AAA
6) yes
6. 1) because the owner holds them until maturity
7) no
7. 1)STRIPS
Debt: U.S. Government Debt
U.S. GOVERNMENT OBLIGATIONS
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-TIPS
1) what is the full name for TIPS 2) fixed or variable interest rate over the life of the bond 3) why will the coupon change 4) interest is paid how often 5) why is the adjustment good and bad 6) why not subject to purchasing power risk 7) if in deflation, at maturity can the value you get back be less than par 7.1) how about maturing during inflation 8) because of the floating principal, does it have lower interest rate compared to regular Treasurys 9) Only available for long or short durations 10) each semiannual payment you could receive up to two interests?
1) Treasury Inflation Protection Securities
2) fixed
3) principal amount is adjusted every 6 months by an amount equal to the change in the Consumer Price Index
4) semi-annually
5) good when inflation drives up the interest, bad when deflation [less intrest]
6) principal adjustment
7) no 7.1) possible to receive a par value above what you paid for it [$1k+] 8) yes 9) long 10) “real interest rate [intrest rate of the bond]” plus an additional return equal to that year’s inflation rate
Debt: U.S. Government Debt
U.S. GOVERNMENT OBLIGATIONS
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-Treasury Notes
1)Intermediate-term securities issued with maturities ranging from
2)issued in minimum denominations [par value] of how much 3) pay interest when 4) quoted in 32nds of what 5)callable?
- Treasury Bills
6) short term securities issued with maturities ranging from 7) issued at a discount from par ($100 minimum) and mature at par? 8)quoted on a discount yield basis?
1) 1 to 10 years
2) $100
3)semi-annually
4) par value
5) no
6) 1, 3, 6 and 12 month maturities
7) true
8true
Debt: U.S. Government Debt
U.S. GOVERNMENT OBLIGATIONS
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-Cash Management Bill (CMB)
1)short term securities issued with maturities ranging from 2) Unlike other Treasury securities that are sold at a regularly scheduled auction, these are sold at auction on an “as needed” basis 3) sold at a discount to par? 4) What is minimum par 5) have higher or lower interest rate than equivalent maturity T-Bills sold on a regular auction schedule
1) 5 days to 6 months 2) Treasury sells to smooth out its cash flow needs 3) yes 4) $100 5) higher
Debt: U.S. Government Debt
U.S. GOVERNMENT OBLIGATIONS
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-Series EE Bonds
1)range you can buy them 1.1) sold at face amount, no discount 2) how is interest paid 2.1) when do you get the interest 3) stated maturity? 4) interest change 5) interest is subject to federal income tax when 6) where can you buy them 7) where can you redeem them 8) are they traded and do you get a certificate
1) $25.00-$10k 1.1) correct 2) “earned” monthly and credited to the principal amount every 6 months. 2.1) get it when you redeem 3) no can hold on to them and will pay intrest up to 30 year 4) no 5) upon maturity or redemption 6)treasurydirect.com 7) the treasury 8)no
Debt: U.S. Government Debt
U.S. GOVERNMENT OBLIGATIONS
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-Federal Farm Credit System
1) why do commercial banks and brokerage sell discount notes, designated bonds, bonds, and retail bonds? 2) are these investments implicitly back [not guaranteed] by the U.S. government 2.1) benefit to not being guaranteed 3) given the same rating as treasuries? 3.1) what is the rating [mood, S&P] 4)dealers quote agencies on a “yield spread basis” to equivalent maturity Treasuries? 4.1)example
1) to fund federal farm credit banks so farmers can take short term loans [plant], intermediate-term loans [buy equipment] and long term loans [buy land] 2) yes 2.1) the typical yield is .25% higher than equivalent maturity treasuries 3) yes 3.1) AAA-moody, AA-S&P 4) yes
4. 1)30 year Treasury Bond is yielding 4.50%, while the 30 year Federal Farm Credit Bond is yielding 4.75%, the dealer will quote the FFCB bond at “25 basis points over.”
Debt: U.S. Government Debt
U.S. GOVERNMENT OBLIGATIONS
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-Federal Farm Credit System: Discount Notes
1) Duration 2) sold at a discount or premium 3) minimum face and increment thereafter
-Federal Farm Credit System: Designated Bonds
4) Duration 5) callable or noncallable 6) interest paid when 7)minimum face and increment thereafter
-Federal Farm Credit System: Bonds
8) Duration 9)callable or noncallable 10) interest paid when 11)minimum face and increment thereafter 12) how are floating rate bonds different [issued amount]
-Federal Farm Credit System: Retail Bonds
13) similar to bond above, buy why considered “retail” 14) what is the unique estate planning feature
1) short term, one year or less 2)discount 3)$5k/ $1k
4) 2-10 years 5)noncallable 6)semi-annually 7) $5k/ $1k
8) up to 30 years 9)callable 10)semi-annually 11)$5k/ $1k 12) $10k/$1k
13) lower minimum face of $1k 14) “survivor’s option” which allows the bond to be redeemed at par plus accrued interest upon death to pay estate taxes
Debt: U.S. Government Debt
U.S. GOVERNMENT OBLIGATIONS
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-Gov. Home Mortgages
1) Of the agencies: FHLB, Fannie Mae, Ginnie Mae, and Freddie Mac, all are implicitly backed by the government except for which one that is guaranteed 2) The agencies obtain the funds to buy the mortgages by doing what 3) THese agencies sell bonds to finance the purchase of home mortgages for the purpose of what 4) Did Gov. “takeover” Fannie and Freddie in the fall of 2008? 4.1) mortgages guaranteed by the government
1) GNMA=guaranted 2) selling bonds to the public 3) to create a secondary market for home mortgages, allowing originating bank that loaned the mortgage to sell and get more money to lend/ give more mortgages
4) no, they are a “conservatorship” where their management and operations are controlled by the Federal Government 4.1) no
Debt: U.S. Government Debt
U.S. GOVERNMENT OBLIGATIONS
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-Gov. Home Mortgages: Federal Home Loan Bank (FHLB)
1)first mortgage agency created during the great depression to do what 2) main collateral for the loans being 3) to finance this activity, FHLB issues 3.1) As with all agency securities, these securities are offered through who
Discount notes:
4) have a duration of what 5) interest or sold at a discount 6)
minimum face and increments thereafter 7) why do they yield
more than equivalent maturity t-bills
Callable Bonds / Non-Callable Bullet Bonds
8)have a duration of what 9)interest or sold at a discount 10) minimum face and increments thereafter 11) what are bullet bonds
1) provide funds to institutions so they could give homeowners mortgages 2) S & L mortgages 3) discount notes and bonds 3.1)selling group of dealers
4) 1 year or less 5) sold at discount 6)$100k/$1k 7)not guaranteed by the government
8) up to a 30 year 9) interest semiannual 10)$10k/$1k 11) non-callable bonds, they have a bullet next to the listing to let you know it’s noncallable
Debt: U.S. Government Debt
U.S. GOVERNMENT OBLIGATIONS
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-Gov. Home Mortgages: Mortgage-Backed Securities
1) the 3 housing agencies that deal with them 2) why do they continuously buy mortgages from originating banks 3) how does a “pool work” 4) certificates are self-liquidating why 4.1) problem with this
1) Fannie Mae, Ginnie Mae, and Freddie Mac [FHLB does not] 2) gives the banks fresh funds to lend out on new mortgages 3)once enough mortgage has been purchased, they are placed into a poo, the pool is divided into $25k mortgage-backed pass-through certificates and sold to investors 4)as mortgage payments are made/ paid off [P&I], they are passed through to holders 4.1) prepayment risk, real maturity is unknown, duration can be shorter as loans are refinanced or paid off early.
