US Gov't Debt Flashcards
How does the US Govt debt auction work?
Weekly auction for T-Bills
Monthly auction for all other Treasuries
What type of Gov’t debt gets the highest rating?
DIRECT treasury debts
What are the basic characteristics of treasury bonds?
- 30 year maturity
- multiples of $100
- quoted in 32nds
- callable after 5 years (usually)
What is a treasury STRIP?
A bond that “STRIPS” off the coupons from the bond, leaving only the final principal payment that will occur years in the future. Each interest and principal payment becomes a zero coupon bond
What are TIPS?
Treasury Inflation protection securities. They have a FIXED interest rate, and the principal is ADJUSTED every 6 months according to the CPI
What is advantageous about TIPS?
They are not subject to purchasing power risk
What is the formula used to calculate TIPS return?
Original Rate + Inflation rate = TIPS total return
What are the basic characteristics of treasury NOTES?
- 1 to 10 year maturity
- multiples of 100
- quoted in 32nds
- NON-CALLABLE
What are cash management bills?
Several day to 6 month maturity bills that are sold on an “as needed” basis when treasury is low on cash
What is a bullet bond?
These bonds are called such because they have a bullet under the listing stating they are non-callable
How does FNMA generate revenue?
Income is derived from spread between rate at which it borrows and earns on mortgages, along with service fees
GNMA facts:
Only agency directly backed by US Gov’t.
Slightly lower yield than FNMA
FHLMC purpose:
buy conventional mortgages that don’t carry gov’t insurance or guarantee
What is Sallie Mae?
Purchases student loans
What is a CMO?
a Collateralized mortgage obligation. Fixed rate of interest over term of loan. Mortgages paid monthly
How does a fixed rate mortgage affect principal and interest payments?
In early years, payment is mostly interest. In later years, payments are mostly principa
How are tranches created?
They are based upon the expected cash flows to be received over the life of the pool
How are interest payments received on a CMO distributed?
They are distribute pro-rata to all tranches and pre-payments are used to retire tranches in ORDER
How are Plain vanilla CMOs interest and principal paid out?
Interest is paid proportionately to ALL tranches
Principal is paid sequentially (Tranche 1, 2, 3, etc)
How are interest payments on PAC, TAC, and Companion Tranches paid?
Still made pro-rata
What is the main characteristic of a PAC (Planned amortization class)?
- It protects against BOTH pre-payment and extension risk
- Principal repayments made LATER than expected are applied here
What are the main characteristics of a companion class?
- Principal repayments that are above what was required are applied here
- Has a high level of prepayment AND extension risk
What are the main characteristics of a TAC?
- Pays a target amount of principal each month
- protects again PRE-payment risk, but not extension risk
What are the basics behind a floating rate tranche?
- They are tied to a recognized index (i.e. LIBOR)
- have a max rate cap and floor
- market risk in minimized (variable)
How do prices move on a PO (principal only) security?
Normally - inverse of market interest (like regular bonds)
How do prices move on an IO (interest only) security
Directly. Prices move in same direction as the interest rates
Are CMO’s exempt from SEC?
No. They must be registered and sold with a prospectus
Who appoints a firm as a “primary” dealer?
The Fed
What happens when the fed Loosens credit?
It buys treasuries, causing rates to go down
What happens when the fed tightens credit?
It sells treasuries, causing rates to go up
How are government bonds settled?
Regular way, which for US govt. bonds is NEXT BUSINESS day after trade date
How is accrued interest on govt. bonds computed?
ACTUAL day month year
How is accrued interest on AGENCY issues computed?
30/360 basis
How are discounts on T-bills and STRIPS taxed?
T-bills discount is taxed as interest in the year received
Discount on STRIPS is accreted and taxed annually
How are adjustments to the principal of a TIP treated/taxed?
Adjusted upwards - taxable interest income
Adjusted down - deductible interest expense
