US gov debt Flashcards
Do US gov bonds have high or low liquidity risk?
low liquidity risk
Why does the US gov have a lack of default risk?
Because they can make their own money
What is the US gov debt backed by?
Full and direct backing of the federal gov
Which risk is US gov bonds completely devoid of?
default risk
What is the unique minimum denomination of treasury securities?
100$
What are the 5 treasury products primarily used to finance federal gov?
- T bills
- T notes
- T bonds
- STRIPS
- TIPS
Are treasury bills short term or long?
short
What is the auction frequency of T bills?
weekly
What is the auction frequency of all treasury products other than T Bills
Monthly
What are the six maturity frequencies treasury bills are offered?
- one month
- two months
- three months
- four months
- six months
- one year
Are treasury bills issued at discounts or premiums and why?
discounts because they are zero coupon
When do t bills pay interest? How does this differ from other bonds?
T bills pay interest at maturity whereas others do semi-anually
When are T notes auctioned?
Monthly
When do T notes pay interest?
semi-anually
When do T notes mature between?
2 and 10 years
What -term are T notes?
intermediate
What -term are T bonds?
long-term
When do T bonds mature?
30 years
Are STRIPS long term or short term? How long?
Long term, 30 years
Why are STRIPS issued at deep discounts?
Because your return doesn’t come back for 30 years
Four steps to create Treasury receipts?
- Financial institutions purchase sets of T notes and T bonds
- Place them into portfolio
- Strip them of their coupons
- Re-sell them as zero coupon bonds
How do treasury receipts differ from STRIPS?
They are created by financial institutions, not US GOV
How does the risk of Treasury receipts compare to US bonds?
US bonds have no default risk, Treasury receipts do because they are creations of financial institutions
When are treasury receipts and STRIPS taxed?
Anually
What is phantom tax?
When STRIPS and Treasury receipts are taxed annually so you pay throughout their life before they mature
When would an investor invest in TIPS?
When the stock market is too risky with inflation risk
What do TIPS do to combat inflation rise?
They adjust their interest rates payments to make them higher if inflation goes up by increasing par
What are the values of TIPS adjusted against?
Consumer Price Index
What are the three maturities TIPS are issued at
- 5
- 10
- 15
How are the interest rates adjusted in tips?
The par values change instead of the coupon rate
What par value do TIPS receive at maturity even though the par flucuates?
The greater of the original par value
Treasury bills are what type of coupon?
zero coupon
What type of treasury products are not suitable for investors seeking income and why?
STRIPS and Treasury receipts because they are zero coupon
What type of bonds move the fastest with interest rates change?
long maturity and low coupon
Why are treasury receipts very volatile?
Becaue they have long maturities and low coupons
What risk are STRIPS and treasury receipts very subject to?
interest rate risk
What does the principal adjust to for TIPS?
Adjusts to the CPI
What is funded debt?
Long term corporate debt
Are T bills secured or unsecured?
They are unsecured with no collateral
What type of securities are t bills when they mature in 1 year?
money market debt
What treasury security has the highest inflation risk and why?
Treasury bonds because they are very long term
What does it mean to trade flat?
There is no accrued interest
Which two securities have phantom tax?
STRIPS and treasury receipts
What are three treasury securities that trade flat?
- t bills
- STRIPS
- treasury receipts
How often are phantom taxes paid on STRIPS?
anually
What is the dual mandate of the federal reserve?
- encouraging economic growth
- Managing inflation levels
What is economic growth measured by?
GDP and GNP
What is the difference between GDP and GNP
GDP = all goods and services within country’s borders
GNP = Includes goods and services by residents that live temporarily in a different country
What are GDP and GNP measured in?
Constant dollars
What does constant dollars mean?
The reported data is inflation-adjusted
What counts as a recession?
Two consecutive quarters of GDP decline
What counts as depression?
six straight quarters of GDP decline
What does it mean if a company good or services is price elastic?
describes that their demand is flexible
What is an inelastic good or service?
Service or good where demand usually doesn’t fall
What type of goods or services are inelastic?
Something people can’t live without or has no com
What four loosening policies the gov would do if the economy is shrinking?
- lower discount rate
- engage in repurchase agreements with banks
- Lower bank reserve requirements
- Lower regulation T (margin rules)
What describes loosening policies?
Aim to increase the supply of money
What are two characteristics of elastic goods or service?
- demand falls drastically as price rises
- not necessity or has competition
When does the fed do loosening policies?
When GDP declines
What three things does an economic peak involve?
- low interest rates
- high GDP/GNP levels
- low unemployment levels
What are three things economic troughs involve?
- low interest rates
- low GDP/GNP levels
- high unemployment
When does CPI rise?
If prices increase
WHen would the gov inact tightening policies?
When there is higher inflation
What are 4 tightening policies to reduce inflation?
- raise discount rate
- Engage in reverse repurchase agreements with banks
- Raise bank reserve requirements
- Raise Regulation T
What is the relationship between money supply and interest rates?
Lower money supply, higher interest rates
Higher money supply,
lower interest rates
What are yield curves?
THey display yields of similar debt securities across multiple maturities
Why would an investor change from short term securities to long term securities before times of recession?
In order to lock in higher coupons
What is a credit yield spread?
Juxtaposes two different sets of yield curves
What do comparative yield curves measure?
The difference between the two yield curves
What is the monetarist theory?
Fed’s actions are most significant economic influence
What do standard yield curves show?
Securities with shorter maturities maintain lower yields than long term maturities
What market sentiment does flat yield curve indicate?
Uncertaintiy in bond market
What is the relationship in yields between short term and long term debt securities in a flat yield curve?
Same yield
What is the relationship between demand for short and long term securities and price and yield?
Less dmand for short term seccurities = lower prices and higher yields
More demand for long term securities = higher prices and lower yields
What do investors do that creates a flat yield curve?
Liquidate their short-term debt securities and buy longer term bonds
What does an inverted yield curve indicate?
A pending recession
What is the relationship in yields between short-term and long term debt securities with inverted yield curve?
Short term debt securities maintain higher yields than long term
What do investors do with their short-term debt securities ahead of a recession?
They liquidate short term and enter longer-term bonds
2 reasons why do investors move money from short-term to long term in expectation of a recession?
Because they can lock in higher interest rates for long periods while interest rates decline
Bond prices rise when interest rates fall, providing capital appreciation potential
What comparative yield signals economic depression?
Widening of US Corp and US Gov yield curves
Which directions do Corp and Gov yields go signaling economic recession?
Further apart
Why is there deccreased demand in corporate investments ahead of a recession?
Because they are more risky than us government securities
What does the decreased demand of corporate bonds do to their prices and yields?
Drive down prices and raises yields
What does the increased demand for us gov bonds do to prices and yields?
Drives up prices and lowers yields
What type of comparative yield curve signals economic depression?
Widening
What type of comparative yield curve signals economic expansion?
Narrowing
What are investors buying in times of economic prosperity in relation to yield curves?
Liquidating safer US gov bonds and buying riskier corporate bonds
What does the decreased demand for us gov securities do to prices and yields?
Drives up prices and lowers yields
What does the increased demand for corporate securities do to prices and yields?
Drives down prices and heightens yields
What are the 6 most common leading indicators?
- S&P 500
- average weekly initial claims for unemployment
- index of new manufacturing orders
- number of new building permits
- consumer confidence index
- interest rate spread between 10 year t notes and fed fuds rate
What is the interest rate spread between 10 year t notes and. thefederal funds rate a good predictor of?
Economic decclines
What is the relationship between 10 year t notes and federal funds that indicates recession?
T notes interest rates fall below federal funds rate
What do coincident indicators provide?
Insight into the economy’s current, not future strength
What are 6 coincidence indicators?
- number of employees on non farm payrolls
- average hours worked
- personal income levels
- industrial production levels
- manufacturing sales
- unemployment rate
What does a lagging indicator provide?
Insight into the economy’s past performance
4 most commonly cited lagging indicators?
- Changes in CPI levels
- Corporate profits
- Change in labor cost per unit of output
- Average duration. ofunemployment
How do unemployment claims differ to make them lagging, leading, or coincidence
Initial unemployment = leading indicator
unemployment rate = coincident indicator
duration of unemployment = lagging indicator
What are four economic market structures?
- perfect competition
- monopolistic competition
- oligopoly
- monopoly
What do perfect competition structures invollve?
Many buyers and sellers of virtually identical products
What is a good example of a perfect competition and why?
Farmers market because they offer same products and prices are primary factor determining demand
What is the relationship between perfect competition and price influence power?
Nobody dominates the market with the power to influence prices upwards or downwards
How does monopolistic competition differ from perfect competition?
but consumer demand is not strictly price related but due to unique features between products
Why would one vendor attempting to manipulate the price not work in monopolistic competition?
Because of the large number different products or services available
What is the difference between perfect competition and monopolistic competition in regard to demand?
In a farmers market the cheapest apple will have the highest demand, but chip aisle, there is more in play with demand than just price
What buyer to seller ratio structure do oligopolies involve
many buyers but a limited amount of sellers
Why do oligopoly have few vendors?
Market entry cost
What buyer to seller ratio structure do monopolies involve
Many different buyers, but only one seller
What is the relationship between demand and price for elastic goods?
Demand falls drastically. as price rises
What type of policies does fed enact with high inflation?
tightening money supplies
Yield short term vs. long term in all three curves?
Normal = short term < long term
Flat = short term = long term
inverted = Short term > long term
What is the primary demand factor for perfection competition?
price
Which two market structures are price manipulation hard?
perfect competition and monopolistic competition
Which two market structures are price manipulation easy?
Oligopoly and monopoly
What will the federal reserve do to interest rates to combat inflation?
raise interest rates
How does increasing interest rates combat inflation?
Reduces economic activity
Who measures the CPI?
US Bureau of Labor Stastics
What does the CPI measure?
price changes of goods and services
What two entities implement fiscal policies?
- congress
- president
What do fiscal policies focus on two things?
- how government collects
- how government spends
What three roles does IRS fufill?
- collecting taxes
- providing assistance to taxpayers
- investigating fraud
When does a levy occur?
When the IRS places a hold on a property to satisfy a debt
Who is the IRS an agency of?
US Department of T
What is the lowest federal income tax bracket?
10 percent
What is the highest income tax bracket?
37
What are three types of progressive tax systems?
- personal income
- estate
- gift
In a progressive tax system, who. is subject to lower taxes?
people with less money
What describes a regressive tax system?
Same regardless of income levels or amount of money involved
What are two examples of regressive tax?
- sales tax
- exise tax
What does kensyian theory state?
increased government spending drives economy’s growth
What should the government do in a recession according to keynes and 2 reasons why why?
spend immense amounts of money to
1. drive up demand for certain goods and services while
2. increasing employmentAc
According to keynes, when should the government increase and decrease tax rates and why?
Increase during inflation to stabilize prices
Decrease during recession to incentivize people to spend more money
What is supply side theory the opposite of?
Keynesian theory
2 ways: How does supply side theory encourage gorwing supply of goods and services?
- Through reduced taxation
- reduced government spending
What belief is the primary difference between supply side and keynesian theory?
What drives economic activity
Demand side proponents believe demand for goods and services come from what?
The government
Supply side proponents believe demand for goods and services come from what?
Private business sector
Two types of policy utilized by gov to influence economy?
- fiscal
- monetary
Who controls fiscal policy vs. monetary policy?
Fiscal = congress and president
Monetary = federal reserve
What is the relationship between government spending and keynesian vs. supply side theory?
Supply side = decreased gov spending benefits economy
Keynesian = increased vo spending benefits economy
What two things does the federal reserve do in a recession?
- increase (loosen) money supply
- Bring interest rates down?
What to things does the federal reserve do in inflationary environment?
- decrease (tighten) money supply
- Bring interest rates up
What does fiscal policy relate to?
Taxation and gov spending
Relationship between gov spending and tax rates in a recession
in keynseian theory?
Gov spending incdreases
Tax rates fall
Relationship between gov spending and tax rates in inflation environment in keynseian theory?
Govt spending decreases
tax rates rise
