Deck 15: Government Securities

Question 1

If interest rates fall, the value of a Ginnie Mae bond should increase.

Answer 1

True

Question 2

Interest earned on series EE bonds is exempt fromfederal income taxation.

Answer 2

False

Question 3

The federal government cannot issue debt that matures in less than five years.

Answer 3

False

Question 4

Series EE bonds were initially designed to tap the funds of savers with modest sums to invest.

Question 5

Agencies of the federal government are not allowed to issue bonds.

Question 6

Treasury bonds may be bought and sold in the secondary markets like corporate bonds.

Question 7

If interest rates decline, the expected life of a Ginnie Mae bond is reduced.

Question 8

The owner of a Ginnie Mae bond receives monthly both interest and principal repayments.

Question 9

The federal government only issues marketable securities such as treasury bills.

Question 10

Federal government debt is believed to have minimal default risk because the government has the power to tax and to create money.

Question 11

Since Ginnie Mae bonds are debt instruments, the timing and amount of each payment is known.

Question 12

Realized returns on all federal government securities are fixed and do not change with changes in interest rates.

Question 13

Investors who acquire indexed bonds (TIPS) avoid the risk associated with inflation.

Question 14

Ginnie Mae bonds are secured by private mortgages.

Question 15

If interest rates are expected to rise, a prudent strategy would be to sell treasury bills and buy treasury bonds.

Question 16

The interest earned on federal government's debt is exempt from state income taxation.

Question 17

Treasury bills are long term federal government securities sold at a discount.

Question 18

Treasury bills are sold for a premium.

Question 19

The prices of treasury bonds are insensitive to changes in interest rates.

Question 20

There is no secondary market for EE bonds.

Question 21

The price of a municipal bond will tend to rise when interest rates decline.

Question 22

Ginnie Maes are

A) long-term bonds issued by the federal government
B) short-term, mortgage-backed securities
C) mortgage backed securities issued by the Government National Mortgage Association
D) long-term mortgage securities sold by banks

Question 23

Treasury bills

A) sell at a discount
B) sell for a premium
C) pay an established 4.5% annual interest
D) mature after one year

Question 24

Municipal bonds are more marketable than corporate and federal government bonds.

Question 25

Which of the following types of securities is notissued by the federal government

A) money market securities
B) long?term bonds
C) stock
D) zero coupon bonds

Question 26

Some municipalities have their municipal bonds insured in order to facilitate marketing (issue) them.

Question 27

If an investor is in the 25 percent income tax bracket and can earn 5 percent on a corporate bond, then 3 percent on a municipal bond is attractive.

Question 28

Yields on municipal bonds exceed yields on corporate bonds with the same term to maturity and credit rating.

Question 29

Zero coupon bonds issued by states are not exempt from federal income taxation.

Question 30

Poor quality municipal bonds pay more interest than poor quality corporate debt.

Question 31

Sources of risk to investors who purchase federalgovernment bonds include1. reinvestment rate risk2. risk of inflation3. interest rate risk

A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of the above

Question 32

Which of the following is not traded in the secondarymarkets

A) U.S. Treasury bills
B) U.S. Treasury bonds
C) series EE bonds
D) municipal bonds

Question 33

Municipal bonds are often examples of serial bonds.

Question 34

Collateralized mortgage obligations (CMOs) are sold in classes ("tranches") that increase the certainty of the timing of payments.

Question 35

A revenue bond is supported by the taxation authority of the issuing government.

Question 36

Municipal bonds are registered with the Federal Reserve.

Question 37

Municipal bonds are considered to be safe investments because they may be readily sold with little chance of loss.

Question 38

Municipal bonds are exempt from federal income but not necessarily from state income taxation.

Question 39

The interest on series EE bonds

A) is exempt from federal income taxation
B) is distributed semi-annually
C) is exempt from state income taxation
D) is taxed even though it is not received until the bond is redeemed

Question 40

If interest rates increase,1. the price of a Ginnie Mae falls2. the price of a Ginnie Mae rises3. the speed with which Ginnie Maes areretired increases4. the speed with which Ginnie Maes areretired declines

A) 1 and 3
B) 1 and 4
C) 2 and 3
D) 2 and 4

Question 41

If an investor is in the 28 percent federal income tax bracket, which bond is to be preferred
a. Single A, ten?year corporate bond yielding 6.5%
b. Single A, ten?year municipal bond yielding 3.1%

Question 42

What is the repayment schedule for the first three years of a $60,000 mortgage loan at 8 percent for twenty five years (Assume that payments are made annually.)SOLUTIONS TO PROBLEMS

Question 43

Sources of risk to investors in municipal bondsinclude1. fluctuations in interest rates2. reinvestment rate risk3. default risk

A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of the above
PROBLEMS

Question 44

A homeowner has been offered three alternative mortgage loans to finance the purchase of a $300,000 house. The interest rate on the first alternative is 8 percent for twenty five years, and the loan requires a 20 percent down payment. The second mortgage loan is also for twenty five years with an interest rate of 7 percent but requires a down payment of a third of the cost of the house. The third loan also requires a third down but is for 20 years at 6 percent. What are the annual mortgage payments required by each loan

Question 45

A portfolio manager is considering buying $100,000 worth of treasury bills for $98,211 versus $100,000 worth of commercial paper for $97,897. Both securities will mature in nine months. How much additional return will the commercial paper generate over the Treasury bills

Question 46

Municipal general obligation bonds are

A) illustrative of a revenue bond
B) not illustrative of a tax-exempt bond
C) supported by taxing authority
D) secured by property

Question 47

What is the value of a $1,000 zero coupon government bond that matures after eight years, if comparable yields are 7%

Question 48

If an individual is in the 35 percent income taxbracket and corporate debt yields 7.5 percent,then to be competitive municipal debt must yieldat least

A) 11.54%
B) 7.59%
C) 4.88%
D) 2.63%

Question 49

You purchase a three-month discount security (e.g., a Treasury bill or commercial paper) for $0.9878 on $1 (i.e., $98,780 for $100,000 face amount). What are the discount yield, the simple annual yield, and the annual compound yield earned by the investment

Question 50

Collateralized mortgage obligations (CMOs)

A) are free of interest rate risk
B) have certain repayment schedules
C) are not exempt from federal income taxation
D) increase in value when interest rates rise

Question 51

Municipal bonds

A) pay more interest than corporate debt
B) are exempt from federal income taxation
C) are exempt from federal estate taxation
D) reduce interest rate risk