unit 7 Flashcards

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1
Q

types of treasury securities

A
  • T-bills
  • T-notes
  • T-bonds
  • STRIPS
  • Treasury receipts
  • TIPS
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2
Q

treasury bills (T-bills)

A
  • short term obligations issued at a discount from par.
  • return is difference between the price the investor pays are par at maturity
  • money market instrument
  • 13 week T-bill is used as risk free investment
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3
Q

treasury notes (T-notes)

A
  • pay interest every 6 months
  • sold at auction every 4 weeks
  • intermediate length securities: 2, 3, 5, 7 or 10 yrs
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4
Q

treasury bonds (T-bonds)

A
  • long term securities (10-30 yrs)
  • pay interest every 6 months
  • callable bonds have not been issued since 1985 and none are available in market. Could call 30 yr bonds 5 yrs before maturity
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5
Q

separate trading of registered interests and principal of securities (STRIPS)

A
  • can break principal and interest into components
  • securities underlying STRIPS are US govt obligations, banks and dealers do the separation and trading
  • minimal reinvestment risk
  • backed full faith and credit of the US govt
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6
Q

treasury receipts

A
  • NOT issued by the US treasury
  • brokerage firms create them as zero coupon bonds
  • BD buys treasury securities, puts them in a trust, sell depart receipts against the principal and coupon payments
  • not back full faith and credit of the US govt
  • priced at discount demote the payment amt
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7
Q

treasury inflation projected securities (TIPS)

A
  • protect investors against purchasing power/ inflation risk
  • issued with a fixed interest rate, but principal is adjusted semi annually based on CPI
  • interest = fixed interest x adjusted principal. Paid every 6 months
  • in inflation, interest payments increase (this is concerned reportable income)
  • in deflation, interest payment decrease
  • TIPS are sold at a lower interest rate than fixed rate treasuries bc of their adjustable nature.
  • TIPS are exempt from state and local income taxes on the interest income generated, but subject to federal tax
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8
Q

T- bills maturities, denominations, pricing

A
  • issued in denominations of $100 to $5mm
  • mature in 52 weeks or less
  • 52 week t-bills are auction every 4 weeks
  • 4 week and 26 week t-bills are aucted weekly
  • quoted on yield and sold at discount from par.
  • zero coupon bonds
  • bid reflects the yield buyers want, ask reflects yield sellers want - higher yield on bid means lower dollar price
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9
Q

T-note maturities, denominations, pricing

A
  • issued in denominations of $100 to $5mm
  • mature at par or refunded
  • issued, quote and traded as a % of par in 1/32%
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10
Q

refunded

A

govt offers the investor a new security with a new interest rate and maturity date as an alternative to a cash payment for the maturing T-note

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11
Q

T-bond maturities, denominations, pricing

A
  • issued in denominations of $100 to $5mm
  • mature at least 10 yrs demo the date of issue
  • issued, quote and traded as a % of par in 1/32%
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12
Q

agency issues

A
  • congress authorizes to issue debt securities: farm credit admin, GNMA
  • other agency like orgs operated by private companies: FHLMC/Freddie Mac, FNMA/Fannie Mae, student loan marketing assoc/SLMA
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13
Q

govt national mortgage assoc (GNMA/Ginnie Mae)

A
  • govt owned corporation that supports HUD
  • only agency securities back by full faith and credit of the federal govt
  • private ledning institutions approved by GNMA originate eligible loans and pill them into securities (pass through certificates) and sell the GNMA mortgage backed securities (MBS) to investors.
  • GNMA only guarantees MBS backed by single and multifamily home loans insured by govt agencies (FHA, VA)
  • principal represented by GNMA certificate constantly decreased as mortgages are paid down
  • quotes in 32s
  • guarantees timely payment of principal and interest
  • backed directly by govt, so risk of default is low
  • offer slightly higher interest rates than comparable treasury securities, but rates are lower than other agency issues
  • interest rate risk
  • prepayment risk: mortgages paid of early
  • extended maturity risk: mortgages will remain outstanding longer than anticipated
  • $1000 minimum and $1 increments after that
  • monthly interest and principal payments
  • taxed at all levels
  • significant reinvestment risk: early principal payments cannot be reinvested at a comparable return
  • issued in min denomination of $1,000 and multiples of $1 after that
  • GNMA is a government-owned corporation that approves private lending institutions, such as banks and mortgage companies, to originate eligible loans, pool them into securities, and sell the GNMA mortgage-backed securities to investors. GNMA does not originate loans, and it does not issue or sell securities.
  • Private lending institutions approved by GNMA originate eligible loans and sell the mortgage-backed securities to investors.
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14
Q

farm credit system (FCS)

A
  • national network of lending institutions that provides ag financing and credit
  • privately owned, govt sponsored
  • raises loanable funds through the sale of farm credit securities to investors
  • NOT backed by fed govt, only banks of FCS
  • 4 banks and 68 farm credit lending inst (fed land banks, fed intermediate credit banks, banks for cooperatives)
  • issued discount notes, floating rate bonds and fixed rate bonds
  • maturity 1 day to 30 yrs
  • proceeds from the sale of securities are used to provide farmers with real estate loans, rural home mortgage loans and crop insurance
  • not pass through securities
  • denomination are $1000 with $1000 increments
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15
Q

fed home loan mortgage corporation (FHMLC/Freddie Mac)

A
  • public corporation
  • create to promote the development of a nationwide secondary market in mortgages by buying residential mortgages from financial inst and packaging them into MBS for sale to investors.
  • Sells: mortgage participate certs (PCs) and guaranteed mortgage cert (GMCs)
  • wide variety of increments with different minimums
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16
Q

mortgage participate certs (PCs)

A
  • make principal and interest payment once a month
17
Q

guaranteed mortgage cert (GMCs)

A
  • make principal and interest payment once a yr
18
Q

fed national mortgage assoc (FNMA/Fannie Mae)

A
  • publicly held corporation that provides mortgage capital
    -buys conventional and insured mortgages from agencies like the FHA and VA
  • securities are backed by Fannie Mae’s general credit
  • issues: debentures, short term discount notes, MBS
  • no certs are actually delivered
  • records of ownership are kept electronically in book entry form
  • min denomination of 1000, with $1 increments
  • interest is paid semi annually
19
Q

student loan marketing assoc/SLMA/Sallie Mae

A
  • issues short term and long term securities
  • proceeds are used to provide student loans for higher edu
  • privately owned
  • common stock (SLM) is traded on Nasdaq
  • 10,000 min denomination
20
Q

Tennessee Valley authority (TVA)

A
  • nation’s largest public power provider and a corporation of the US govt
  • TVA bonds are not back by govt, instead they are backed by revenues generated by the agencies’ projects.
  • often issued with maturity of 50 yrs
21
Q

pass through certificates

A
  • created by pooling a group of mortgages and selling certs representing interests I the pool
  • pass through refers to the mechanism of passing homebuyers interest and principal payments from the mortgage holder to investors
22
Q

interest income on US treasury securities

A
  • interest earned on any securities issued by the US treasury is taxable on the federal level, exempt from state and local taxation, except for TIPS
23
Q

interest income on agency securities

A
  • always subject to federal income tax
  • some differences with state tax
24
Q

taxation of MBS

A
  • interest on Ginnie Mae, Freddie Mac, Fannie Mae certs is taxable at the federal, state and local levels
25
Q

taxation of non-MBS

A
  • interest paid on FCS and fed home loan bank securities are taxable at the federal level and exempt from state and local taxes in most cases