9 – Government Securities – Flashcards
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Treasury Bills
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-Sold at a discount; discount is the yield
-Do not pay interest, therefore no coupon
-Short-term maturities (1,3,6 & 12-mo; also quoted in weeks)
-Minimum denominations of $100
-Taxed as interest income
-Not redeemable until maturity, never callable
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Similarities between T-Notes and T-Bonds
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-Sold with fixed coupon rates
-Pay interest semi-annually
-Issued in minimum denominations of $1,000
-Regular way settlement T+1
-Outstanding issues available in registered or bearer form
-Quoted in 32nds but represented as a decimal
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T-Notes
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-Fixed Income Securities
-Maturities of 2-10 years
-Never callable
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T-Bonds
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-Fixed Income Securities
-Maturities of 10-30 yrs
-Can be callable
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Basis Points on T-Bills
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$100 on 12-mo
$50 on 6-mo/180-dy
$25 on 3-mo
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Treasury Inflation Protected Securities - TIPS
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-Treasury notes and bonds where interest and redemption payments are indexed to the CPI
-Interest is paid semi-annually at a fixed rate which is applied to the inflation adjusted principal value of the bond (not par of $1000)
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STRIPS are:
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-Stripped Treasuries
-Treasury Receipts
Zero-Coupon Treasury Bonds
-Separate Trading of Registered Interest and Principal Securities
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STRIPS
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-Treasury bonds are the underlying security, but with stripped coupons
-Sold at a discount; accreted and taxed annually
-Interest paid at maturity BUT TAXED ANNUALLY
-Interest AND principal is guaranteed by the U.S. Treasury
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STRIP Suitability
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Typically purchased for retirement plans like IRAs and Keoghs that have no current tax liability
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GNMA
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Guaranteed by the US Govt
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T-Bill Settlement
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AUCTION = T+3
Regular way in the secondary market is T+1
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Calculating interest on Government securities
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Regular calendar month/year basis, up to but not including settlement date
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During auction procedures the "Fed Desk" of the Federal Reserve Board primarily trades with which of the following:
I. All brokerage firms
II. Primary Dealers
III. Institution Investors
IV. Individual investors
[A] I and III
*[B] II and IV*
[C] I and IV
[D] II and III
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The Fed handles the distribution of new issues of government securities and deals with Primary Dealers and individual investors during the auction procedures. Remember though that during Open Market Operations the Fed Desk deals directly with Primary Dealers only.
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The following article appeared in the Wall Street Journal:
"The average return to investors on 13-week bills declined to 5.634% on yesterday's sale from 5.675% last week and are the lowest since a 5.632% return last month."
This article indicates which of the following?
[A] The market for short-term funds is weaker as indicated by the decline in yields.
[B] Coupon rates for these new bills increased from coupon rates on previous sales.
[C] Investors paid more for these new bills than they did for other Treasury Bill issues last month.
*[D] Investors paid less for these new bills than other purchasers paid last month.*
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Although the question appears to be complicated, what you end up doing is comparing:
yesterday's discount of 5.634%
to
last month's discount of 5.632%
We find that since "yesterday's" discount was a larger discount, the investor would have paid less (bigger discount = lower price).
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Which of the following is a Treasury bill quote?
*[A] 7.20 - 7.00*
[B] 75 1/2
[C] 75.25 - 75.30
[D] 7.50%
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Treasury Bills are quoted at their Discount and therefore show a Bid higher than the Ask.
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The settlement date for a regular way U.S. Treasury Note transaction is:
[A] same day as trade date.
[B] five business days after trade date.
[C] three business days after trade date.
*[D] next business day after trade date.*
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The settlement date for a regular way U.S. Treasury Note transaction is the next business day after trade date.
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Interest on all of the following securities is subject to state income tax EXCEPT
[A] FNMA debentures
*[B] U.S. Treasury Notes*
[C] Commercial paper
[D] Bankers' acceptances
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All Government Securities interest is subject to Federal Tax but EXEMPT from State & Local tax.
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Cash transactions in U.S. Treasury securities settle:
*[A] same day in federal funds*
[B] next day in clearing house funds
[C] five business days in federal funds
[D] seven business days in federal funds
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All government securities cash transactions settle the same business day as trade date. Regular way trades settle next business day after trade date.
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Which of the following are fully taxable at the Federal, state, and local levels on the interest received?
I. Treasury Notes
II. Ginnie Mae Pass Throughs.
III. Fannie Mae Bonds.
IV. Treasury Bonds.
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[A] I and II
[B] III and IV
*[C] II and III*
[D] I and IV
Treasury Bonds and Treasury Notes are not taxable at the state level or local level. Ginnie Mae's and Fannie Mae's are taxable at all levels, so II and III are correct.
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An investor buys $40,000 of U.S. Treasury Bonds with a 9% coupon rate due 7/1/18 at 104. Which of the following would represent the annual income of the bonds?
[A] $3,500
*[B] $3,600*
[C] $3,744
[D] $4,000
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9% coupon would represent a $90 Annual Income.
$90 of annual interest per bond x 40 Bonds ($40,000 principal) = $3,600 Total Annual Interest
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Government National Mortgage Association (GNMA) certificates are characterized by which of the following:
I. Payment of interest and principal is guaranteed by the U.S. government
II. Pooled farm loans are the principal revenue source for GNMA securities
III. Pooled residential mortgage loans are the principal revenue source for GNMA securities
IV. Interest paid on GNMA securities is exempt from federal income tax
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*[A] I and III only*
[B] I and IV only
[C] II and IV only
[D] I, III, and IV only
Choices I and III are correct. II is wrong because Ginnie Mae does not get involved with farm loans (that's F.I.C.B.'s). IV is wrong because Ginnie Maes are subject to Federal, state, and local tax.
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Which of the following statements are correct regarding U.S. Government agencies' obligations?
I. They are direct obligations of the U.S. Government.
II. They generally have higher yields than the yields of direct U.S. Government obligations.
III. The Federal National Mortgage Association is a publicly traded corporation.
IV. Securities issued by GNMA trade on the NYSE floor.
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[A] I and II
[B] I and III
*[C] II and III*
[D] III and IV
Choices II and III are correct. Choice I is wrong because the securities are direct obligations of the agencies NOT the federal government. Choice IV is wrong because it is the securities of Fannie Mae, not Ginnie Mae, which are traded on the NYSE.
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Which of the following investments are guaranteed by the U.S. Government?
*[A] Government National Mortgage Association pass through securities*
[B] Federal National Mortgage Association securities
[C] Federal Home Loan Bank securities
[D] Federal Intermediate Credit Bank bonds
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Government National Mortgage Association ("Ginnie Maes") pass through securities are the only Federal agency securities guaranteed by the U.S. Government. Remember GGG Ginnies are Guaranteed by the Government!
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How often is interest paid on a U.S. Treasury Receipt?
*[A] It is paid when the security comes due at maturity.*
[B] It is paid on an annual basis.
[C] It is paid on a semi-annual basis.
[D] It is paid on a quarterly basis or four times annually.
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U.S. Treasury Receipts are also known as Zero Coupon Treasury Bonds. These securities function in a similar capacity to zero-coupon bonds. They are issued at a discount and pay all interest at maturity. They do not have coupon payments.
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Which of the following securities normally settle on a next business day basis?
I. U.S. Government Bonds
II. Option contracts
III. U.S. Government Note traded on a cash basis
IV. Municipal Bonds
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*[A] I and II*
[B] III and IV
[C] I, II, and IV
[D] I, II, III, and IV
U.S. Government Bond trades and options settle the next business day. Notes trade on a "cash" basis and would settle on the same day as trade date. Municipal bonds settle on the trade date plus three business days.
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What is the typical settlement for a U.S. Treasury Bill with a 3-month maturity that is sold at the weekly auction on Monday with regular-way settlement?
[A] Regular-way settlement would be 5 business days following the auction
*[B] Regular-way settlement would be 3 business days following the auction, or the Thursday following the auction.*
[C] Regular-way settlement would be the business day following the auction, or the Tuesday following the auction.
[D] Regular-way settlement would be the same business day as the auction, or Monday.
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Regular-way settlement of 3-month T-Bills sold at the weekly auctions on Mondays would be the following Thursday, three business days later.
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Of the following statements about Federal Farm Credit Bonds, which are CORRECT?
I. These bonds are typically found in book-entry form.
II. The U.S. Government directly issues and backs these bonds.
III. Interest income from these bonds is not subject to State taxes.
IV. Interest income from these bonds is not subject to Federal taxes.
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[A] I and II
*[B] I and III*
[C] II and III
[D] III and IV
Federal Farm Credit Bonds are issued in book-entry form, are exempt from state income tax, but are subject to federal tax.
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Normal Settlement date for a transaction in U.S. Government Bonds is:
[A] The same day as trade date.
*[B] Next business day after trade date.*
[C] Three business days following trade date.
[D] Seven business days following trade date.
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U.S. Government securities settle next business day after trade date.
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An investor buys a Treasury Bond on Wednesday, February 24th for cash settlement. The bonds pay interest January 1st and July 1st. How many days of accrued interest is the seller entitled to?
[A] 54 days
[B] 55 days
[C] 60 days
[D] 61 days
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January = 31 actual days
February = 23 *Cash transactions
= 54 TOTAL DAYS
*NOTE: Cash transactions settle same day as trade date. Interest is paid up to but not including settlement date.
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Treasury STRIPS have all of the following characteristics *EXCEPT*:
[A] They are sold at a discount
[B] Their price is volatile
[C] They lock in a rate for a predetermined period
[D] *The accrued interest is taxable at maturity*
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Even through STRIPS and other zero-coupon bonds pay no interest, the investor is still liable for taxes on the annual gains in the value of the bonds. The investor must pay taxes on gains that have not been received. It's called "phantom" income.
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The regular way settlement date on U.S. Treasury Bonds is:
[A] the same day as the trade date
[B] *the next business day after the trade date*
[C] three business days after trade date
[D] five business days after the trade date
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Regular way settlement on U.S. Government securities is the next business day after trade date.
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When is payment typically due on the regular-way purchase of a round lot of T-Notes?
[A] Payment is typically due on the 5th business day.
[B] Payment is typically due on the 3rd business day.
[C] *Payment is typically due on the following business day.*
[D] Payment is typically due on the day of the trade.
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Regular-way settlement for Treasury Securities is the business day following the trade date.
