Deck 15: Government Securities

Question 1

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

Answer 1

False

Question 2

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

Answer 2

False

Question 3

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

Answer 3

False

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

Ginnie Mae bonds are secured by private mortgages.

Question 12

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

Question 13

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

Question 14

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

Question 15

There is no secondary market for EE bonds.

Question 16

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

Question 17

Treasury bills are sold for a premium.

Question 18

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

Question 19

Interest earned on series EE bonds is exempt from
federal income taxation.

Question 20

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

Question 21

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

Question 22

Which of the following types of securities is not
Issued by the federal government?

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

Question 23

Municipal bonds are often examples of serial bonds.

Question 24

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 25

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

Question 26

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

Question 27

Sources of risk to investors who purchase federal
Government bonds include
1) reinvestment rate risk
2) risk of inflation
3) interest rate risk

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

Question 28

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

Question 29

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 30

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 31

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 32

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

Question 33

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

Question 34

Municipal bonds are registered with the Federal Reserve.

Question 35

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

Question 36

Which of the following is not traded in the secondary
Markets?

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

Question 37

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

Question 38

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

Question 39

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

Question 40

If interest rates increase, 1. the price of a Ginnie Mae falls
2) the price of a Ginnie Mae rises
3) the speed with which Ginnie Maes are
Retired increases
4) the speed with which Ginnie Maes are
Retired declines

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

Question 41

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 42

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 43

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 44

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 45

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 46

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 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

Sources of risk to investors in municipal bonds
Include
1) fluctuations in interest rates
2) reinvestment rate risk
3) default risk

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

Question 49

If an individual is in the 35 percent income tax
Bracket and corporate debt yields 7.5 percent,
Then to be competitive municipal debt must yield
At least

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

Question 50

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

Question 51

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?