Deck 21: Treasury and Agency Securities Markets

Question 1

The benchmark interest rate used throughout the U.S. economy is the interest rate on:

A) Agency securities.
B) Treasury securities.
C) Federal funds.
D) Repurchase agreements.
E) None of the above.

Answer 1

Treasury securities.

Question 2

The prominent role of U.S. Treasury securities is due to:

A) Liquidity.
B) Volume.
C) The bid-ask spread.
D) a and b only.
E) All of the above.

Answer 2

a and b only.

Question 3

The fundamental difference between discount and coupon Treasury securities is:

A) The spread between the bid and ask prices is narrower than in other sectors of the bond market.
B) The form of the payment stream that the holder receives.
C) The inflation premium.
D) The tax to be paid on the income received by the holder.
E) None of the above.

Answer 3

The form of the payment stream that the holder receives.

Question 4

Treasury securities that adjust for inflation are referred to as:

A) Inflation indexed bonds.
B) Real return bonds.
C) TIPS.
D) LEAPS.
E) None of the above.

Question 5

Which of the following statements is false?

A) The auction for Treasury securities is conducted on a noncompetitive bidding basis.
B) Competitive bids must be submitted on a yield basis.
C) All U.S. Treasury auctions are single-price auctions.
D) B and c only.
E) None of the above.

Question 6

The highest yield accepted by the Treasury is referred to as the:

A) Tail.
B) Stop yield.
C) Average yield.
D) Income yield.
E) None of the above.

Question 7

Primary dealers for government securities include:

A) Domestic investment banking firms.
B) Foreign investment banking firms.
C) Foreign commercial banks.
D) Domestic commercial banks.
E) All of the above.

Question 8

In which of the following markets are Treasury securities issued when they are traded prior to the issuance of the Treasury?

A) The primary market.
B) The secondary market.
C) The when-issued market.
D) The wi market.
E) c and d only.

Question 9

Coupon stripping is the process of:

A) Separating each coupon payment as well as the principal.
B) Selling securities against each coupon payment and the principal.
C) Creating a series of zero-coupon bonds.
D) Discounting each coupon payment as well as the principal.
E) a, b, and c only.

Question 10

The price of a Treasury security is forced to trade near its theoretical value based on spot rates through the process of:

A) Coupon stripping.
B) Repurchasing.
C) Reconstituting.
D) a and c only.
E) None of the above.

Question 11

The financial instruments traded in the Federal agency securities market include:

A) Federally related institutions' securities.
B) Government-sponsored agency securities.
C) Federal funds.
D) a and b only.
E) All of the above.

Question 12

Government-sponsored enterprises:

A) Are privately owned, publicly chartered entities.
B) Issue securities directly in the marketplace.
C) Issue debentures and mortgage-backed securities.
D) All of the above.
E) None of the above.

Question 13

Governments-sponsored enterprises, which issue agency securities include:

A) Freddie Mac.
B) Fannie Mae.
C) Federal Home Loan Banks.
D) Federal Farm Credit System.
E) All of the above.

Question 14

GSE securities are not backed by the full faith and credit of the U.S. government. Thus, investors purchasing GSEs are exposed to:

A) Credit risk.
B) Currency risk.
C) Political risk.
D) Inflation risk.
E) None of the above.

Question 15

Convertible bonds issued by the British government are referred to as:

A) Bunds.
B) Gilts.
C) TIPS.
D) LEAPS.
E) None of the above.

Question 16

Which of the following foreign governments issue inflation-indexed securities?

A) Canada.
B) Australia.
C) U.K.
D) Japan.
E) a, b, and c only.

Question 17

Central governments issue their securities through:

A) An ad hoc auction system.
B) A Dutch-style system.
C) The regular calendar auction.
D) The tap system.
E) All of the above.

Question 18

The Treasury does not issue:

A) Zero-coupon Treasury securities.
B) Bills.
C) Notes.
D) Bonds.
E) All of the above.

Question 19

The secondary market for Treasury securities is a(n):

A) Active market.
B) Over-the-counter market.
C) Exchange-traded market.
D) Trading floor.
E) None of the above.

Question 20

Interest income from Treasury securities is tax-exempt from Federal taxation.

Question 21

All federally-related institutions are exempt from SEC registration.

Question 22

Any firm can deal in government securities.

Question 23

Noncompetitive tenders may be submitted for up to a $1 million face amount.

Question 24

Salomon Brothers violated the auction process.

Question 25

Describe the auction method used by the Treasury to market Treasury securities.

Question 26

Describe the role of government dealers and government brokers in the Treasury securities market.

Question 27

How did the Treasury respond to the violation of the auction process by Salomon Brothers?