US Government Securities

Question 1

What are three major categories of government securities?

Answer 1

1. Treasuries (direct obligations of US government)
2. Agencies (some are direct obligations, others not)
3. Non marketable government securities (primarily savings bonds)

Question 2

What risks are associated with Treasuries and Agencies?

Answer 2

Interest rate risk and purchasing power risk. No credit risk.

Question 3

Savings bonds offer liquidity and long term security with little credit risk. Two types…

Answer 3

Series EE: 30 year bonds from $50-10k. Purchase at 50% discount to face value. Now have fixed rate of interest reset twice annually.
Series HH: no longer offered to public. Receive in exchange for EEs.

Question 4

Interest in EE and HH Savings bonds is exempt from:

Answer 4

State and local taxes

Question 5

Features of T-bills - list 4

Answer 5

1. Initial maturity of one year or less
2. Maturities of 1, 3, 6 and 12 months
3. Minimum denomination of $1
4. Non-interest bearing / discount securities: trade at discount and mature at par

Question 6

Difference between T-notes and T-bonds?

Answer 6

Original maturity: T-notes 2-10 years / T-bonds 10+ years.

Both are interest bearing with stated coupon paid semi-annually

Question 7

What are stripped securities?

Answer 7

Right to coupon stripped from underlying bond to create a zero-coupon bond and and a zero for each interest payment
Can be created from T-notes and T-bonds

Question 8

How are STRIPS quoted?

Answer 8

Yield basis rather than dollar price (percentage of par) basis

Question 9

What are TIPS?

Answer 9

Treasury inflation protected securities. Principal adjusted up/down according to CPI semi-annually.
Coupon fixed but paid on adjusted principal. Pays higher of adjusted principal or par on maturity.
Adjustment taxed annually as ordinary income.

Question 10

What are registration and filing requirements for US Government Securities?

Answer 10

None

Question 11

How does the Dutch auction of Treasuries work?

Answer 11

All pay lowest price. Non competitive bids filled first. Competitive bids determine price and filled thereafter in order.

Question 12

Where do government securities trade?

Answer 12

Not listed. Trade OTC.

Question 13

How are T-bills quoted?

Answer 13

On a discount yield basis not price. As yield moves invertly to price, bid is higher than ask

Question 14

How are T-notes and T-bills quoted?

Answer 14

% of par and 32nds of a point.

101.24 is 101 and 24/32 so $1,017.50 per $1k bond

Question 15

What’s regular way settlement in government securities?

Answer 15

Next business day.

cash basis same day, skip day T+2

Question 16

When is accrued interest included and how calculated?

Answer 16

Not on T-bills or skips (zero coupon) but on notes and bonds.
365 day year up to but not including settlement day.
Added to purchase price.

Question 17

GNMA issues modified pass throughs. What are they?

Answer 17

Interest and principal repayment on mortgages passed through to certificate holders, with government guarantee against default.

Question 18

List the government agency and the various government-sponsored enterprises?

Answer 18

Agency: GNMA
GSEs: FHLMC
FNMA
FFCB
FHLB
SLMA

Question 19

Does a CMO have an interest in the underlying security?

Answer 19

No. Represent a debt obligation of issuing entity.

Principal payments made against tranches, shortest maturity first.

Question 20

Key features of CMO (rating and unique feature)

Answer 20

• usually highly rated due to underlying collateral

- unique in that they provide interest and principal repayment at the same time

Question 21

Rules on retail communications of CMOs?

Answer 21

1. Must include “collateralised mortgage obligation”
2. Disclose agency backing applies to face value only, not any premium paid
3. May not be compared to any other type of investment
4. Yield and average life dependent on rate of prepayment and interest rates

Question 22

What are approval and filing requirements on Comms about CMOs?

Answer 22

Approval by principle in advance even if using FINRA standard communication.
Filed with FINRA within 10 days.

Question 23

What are CDOs?

Answer 23

Similar to CMO but backed by non-mortgage assets.
Generally not suitable for retail investors.
As a corporate issue, subject to filing on 1933, 1934 and 1939 acts

Question 24

What’s the name of the last tranche of a CMO to receive interest and principal?

Answer 24

The Accrual Bond

Question 25

Difference between pass through pools and CMO?

Answer 25

CMOs can issue multiple types of security

Question 26

Sallie Mae does two things:

Answer 26

1. Provides liquidity by purchasing federally sponsored student loans
2. Lends funds to educational institutions

Question 27

Which has more consistent income stream: CMOs or GNMA?

Answer 27

CMOs as prepayment on GNMAs can lead to fluctuations. Tranching of CMOs provides protection against this.