US Government Securities Flashcards
What are three major categories of government securities?
- Treasuries (direct obligations of US government)
- Agencies (some are direct obligations, others not)
- Non marketable government securities (primarily savings bonds)
What risks are associated with Treasuries and Agencies?
Interest rate risk and purchasing power risk. No credit risk.
Savings bonds offer liquidity and long term security with little credit risk. Two types…
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.
Interest in EE and HH Savings bonds is exempt from:
State and local taxes
Features of T-bills - list 4
- Initial maturity of one year or less
- Maturities of 1, 3, 6 and 12 months
- Minimum denomination of $1
- Non-interest bearing / discount securities: trade at discount and mature at par
Difference between T-notes and T-bonds?
Original maturity: T-notes 2-10 years / T-bonds 10+ years.
Both are interest bearing with stated coupon paid semi-annually
What are stripped securities?
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
How are STRIPS quoted?
Yield basis rather than dollar price (percentage of par) basis
What are TIPS?
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.
What are registration and filing requirements for US Government Securities?
None
How does the Dutch auction of Treasuries work?
All pay lowest price. Non competitive bids filled first. Competitive bids determine price and filled thereafter in order.
Where do government securities trade?
Not listed. Trade OTC.
How are T-bills quoted?
On a discount yield basis not price. As yield moves invertly to price, bid is higher than ask
How are T-notes and T-bills quoted?
% of par and 32nds of a point.
101.24 is 101 and 24/32 so $1,017.50 per $1k bond
What’s regular way settlement in government securities?
Next business day.
cash basis same day, skip day T+2
When is accrued interest included and how calculated?
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.
GNMA issues modified pass throughs. What are they?
Interest and principal repayment on mortgages passed through to certificate holders, with government guarantee against default.
List the government agency and the various government-sponsored enterprises?
Agency: GNMA GSEs: FHLMC FNMA FFCB FHLB SLMA
Does a CMO have an interest in the underlying security?
No. Represent a debt obligation of issuing entity.
Principal payments made against tranches, shortest maturity first.
Key features of CMO (rating and unique feature)
- usually highly rated due to underlying collateral
- unique in that they provide interest and principal repayment at the same time
Rules on retail communications of CMOs?
- Must include “collateralised mortgage obligation”
- Disclose agency backing applies to face value only, not any premium paid
- May not be compared to any other type of investment
- Yield and average life dependent on rate of prepayment and interest rates
What are approval and filing requirements on Comms about CMOs?
Approval by principle in advance even if using FINRA standard communication.
Filed with FINRA within 10 days.
What are CDOs?
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
What’s the name of the last tranche of a CMO to receive interest and principal?
The Accrual Bond
Difference between pass through pools and CMO?
CMOs can issue multiple types of security
Sallie Mae does two things:
- Provides liquidity by purchasing federally sponsored student loans
- Lends funds to educational institutions
Which has more consistent income stream: CMOs or GNMA?
CMOs as prepayment on GNMAs can lead to fluctuations. Tranching of CMOs provides protection against this.
