1
Q
types of treasury securities
A
- T-bills
- T-notes
- T-bonds
- STRIPS
- Treasury receipts
- TIPS
2
Q
treasury bills (T-bills)
A
- short term obligations issued at a discount from par.
- return is difference between the price the investor pays are par at maturity
- money market instrument
- 13 week T-bill is used as risk free investment
3
Q
treasury notes (T-notes)
A
- pay interest every 6 months
- sold at auction every 4 weeks
- intermediate length securities: 2, 3, 5, 7 or 10 yrs
4
Q
treasury bonds (T-bonds)
A
- long term securities (10-30 yrs)
- pay interest every 6 months
- callable bonds have not been issued since 1985 and none are available in market. Could call 30 yr bonds 5 yrs before maturity
5
Q
separate trading of registered interests and principal of securities (STRIPS)
A
- can break principal and interest into components
- securities underlying STRIPS are US govt obligations, banks and dealers do the separation and trading
- minimal reinvestment risk
- backed full faith and credit of the US govt
6
Q
treasury receipts
A
- NOT issued by the US treasury
- brokerage firms create them as zero coupon bonds
- BD buys treasury securities, puts them in a trust, sell depart receipts against the principal and coupon payments
- not back full faith and credit of the US govt
- priced at discount demote the payment amt
7
Q
treasury inflation projected securities (TIPS)
A
- protect investors against purchasing power/ inflation risk
- issued with a fixed interest rate, but principal is adjusted semi annually based on CPI
- interest = fixed interest x adjusted principal. Paid every 6 months
- in inflation, interest payments increase (this is concerned reportable income)
- in deflation, interest payment decrease
- TIPS are sold at a lower interest rate than fixed rate treasuries bc of their adjustable nature.
- TIPS are exempt from state and local income taxes on the interest income generated, but subject to federal tax
8
Q
T- bills maturities, denominations, pricing
A
- issued in denominations of $100 to $5mm
- mature in 52 weeks or less
- 52 week t-bills are auction every 4 weeks
- 4 week and 26 week t-bills are aucted weekly
- quoted on yield and sold at discount from par.
- zero coupon bonds
- bid reflects the yield buyers want, ask reflects yield sellers want - higher yield on bid means lower dollar price
9
Q
T-note maturities, denominations, pricing
A
- issued in denominations of $100 to $5mm
- mature at par or refunded
- issued, quote and traded as a % of par in 1/32%
10
Q
refunded
A
govt offers the investor a new security with a new interest rate and maturity date as an alternative to a cash payment for the maturing T-note
11
Q
T-bond maturities, denominations, pricing
A
- issued in denominations of $100 to $5mm
- mature at least 10 yrs demo the date of issue
- issued, quote and traded as a % of par in 1/32%
12
Q
agency issues
A
- congress authorizes to issue debt securities: farm credit admin, GNMA
- other agency like orgs operated by private companies: FHLMC/Freddie Mac, FNMA/Fannie Mae, student loan marketing assoc/SLMA
13
Q
govt national mortgage assoc (GNMA/Ginnie Mae)
A
- govt owned corporation that supports HUD
- only agency securities back by full faith and credit of the federal govt
- private ledning institutions approved by GNMA originate eligible loans and pill them into securities (pass through certificates) and sell the GNMA mortgage backed securities (MBS) to investors.
- GNMA only guarantees MBS backed by single and multifamily home loans insured by govt agencies (FHA, VA)
- principal represented by GNMA certificate constantly decreased as mortgages are paid down
- quotes in 32s
- guarantees timely payment of principal and interest
- backed directly by govt, so risk of default is low
- offer slightly higher interest rates than comparable treasury securities, but rates are lower than other agency issues
- interest rate risk
- prepayment risk: mortgages paid of early
- extended maturity risk: mortgages will remain outstanding longer than anticipated
- $1000 minimum and $1 increments after that
- monthly interest and principal payments
- taxed at all levels
- significant reinvestment risk: early principal payments cannot be reinvested at a comparable return
- issued in min denomination of $1,000 and multiples of $1 after that
- GNMA is a government-owned corporation that approves private lending institutions, such as banks and mortgage companies, to originate eligible loans, pool them into securities, and sell the GNMA mortgage-backed securities to investors. GNMA does not originate loans, and it does not issue or sell securities.
- Private lending institutions approved by GNMA originate eligible loans and sell the mortgage-backed securities to investors.
14
Q
farm credit system (FCS)
A
- national network of lending institutions that provides ag financing and credit
- privately owned, govt sponsored
- raises loanable funds through the sale of farm credit securities to investors
- NOT backed by fed govt, only banks of FCS
- 4 banks and 68 farm credit lending inst (fed land banks, fed intermediate credit banks, banks for cooperatives)
- issued discount notes, floating rate bonds and fixed rate bonds
- maturity 1 day to 30 yrs
- proceeds from the sale of securities are used to provide farmers with real estate loans, rural home mortgage loans and crop insurance
- not pass through securities
- denomination are $1000 with $1000 increments
15
Q
fed home loan mortgage corporation (FHMLC/Freddie Mac)
A
- public corporation
- create to promote the development of a nationwide secondary market in mortgages by buying residential mortgages from financial inst and packaging them into MBS for sale to investors.
- Sells: mortgage participate certs (PCs) and guaranteed mortgage cert (GMCs)
- wide variety of increments with different minimums
16
Q
mortgage participate certs (PCs)
A
- make principal and interest payment once a month
17
Q
guaranteed mortgage cert (GMCs)
A
- make principal and interest payment once a yr
18
Q
fed national mortgage assoc (FNMA/Fannie Mae)
A
- publicly held corporation that provides mortgage capital
-buys conventional and insured mortgages from agencies like the FHA and VA - securities are backed by Fannie Mae’s general credit
- issues: debentures, short term discount notes, MBS
- no certs are actually delivered
- records of ownership are kept electronically in book entry form
- min denomination of 1000, with $1 increments
- interest is paid semi annually
19
Q
student loan marketing assoc/SLMA/Sallie Mae
A
- issues short term and long term securities
- proceeds are used to provide student loans for higher edu
- privately owned
- common stock (SLM) is traded on Nasdaq
- 10,000 min denomination
20
Q
Tennessee Valley authority (TVA)
A
- nation’s largest public power provider and a corporation of the US govt
- TVA bonds are not back by govt, instead they are backed by revenues generated by the agencies’ projects.
- often issued with maturity of 50 yrs
21
Q
pass through certificates
A
- created by pooling a group of mortgages and selling certs representing interests I the pool
- pass through refers to the mechanism of passing homebuyers interest and principal payments from the mortgage holder to investors
22
Q
interest income on US treasury securities
A
- interest earned on any securities issued by the US treasury is taxable on the federal level, exempt from state and local taxation, except for TIPS
23
Q
interest income on agency securities
A
- always subject to federal income tax
- some differences with state tax
24
Q
taxation of MBS
A
- interest on Ginnie Mae, Freddie Mac, Fannie Mae certs is taxable at the federal, state and local levels
25
taxation of non-MBS
- interest paid on FCS and fed home loan bank securities are taxable at the federal level and exempt from state and local taxes in most cases
Series 7
flashcards
Decks in class (19)
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