Deck 17: Government Securities

Question 1

Federal government debt does not have default risk because the government has the power to tax and to create money.

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

Ginnie Mae bonds are secured by private mortgages.

Question 12

Treasury bills are sold for a premium.

Question 13

The value of federal government securities is exempt from estate taxation.

Question 14

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

Question 15

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

Question 16

There is no secondary market for EE bonds.

Question 17

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

Question 18

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

Question 19

Most of the federal government debt matures in less than five years.

Question 20

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

Question 21

If an investor is in the 30 percent income tax bracket and can earn 6 percent on a corporate bond,then 4.1 percent on a municipal bond is attractive.

Question 22

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

Question 23

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

Question 24

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 25

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

Question 26

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

Question 27

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

Question 28

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

Question 29

Yields on municipal bonds exceed yields on federal government bonds with the same term to maturity.

Question 30

Municipal bonds are often examples of serial bonds.

Question 31

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 32

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

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

Question 33

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 34

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

Question 35

Municipal bonds are not registered with the SEC.

Question 36

Many municipalities have their municipal bonds insured in order to facilitate marketing (issuing)them.

Question 37

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 38

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

A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices

Question 39

Ginnie Maes are
1)long-term bonds issued by the federal government
2)short-term,mortgage-backed securities
3)mortgage-backed securities issued by the Government National Mortgage Association
4)sold in units of $25,000

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

Question 40

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

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 is the discount yield and the annual yield earned by the investment?

Question 42

A homeowner has been offered three alternative mortgage loans to finance the purchase of a $90,000 house.The interest rate on the first alternative is 10 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 9 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 8 percent.What are the annual mortgage payments required by each loan?

Question 43

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 44

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.)

Question 45

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 these choices

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 9.5%
b.
Single A, ten-year municipal bond yielding 7.1%

Question 47

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 48

Collateralized mortgage obligations (CMOs)
1)are free of the risk of default
2)have more certain repayment schedules than Ginnie Maes
3)are a means to avoid reinvestment rate risk

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

Question 49

A portfolio manager is considering buying $100,000 worth of Treasury bills for $96,211 versus $100,000 worth of commercial paper for $95,897.Both securities will mature in nine months.How much additional return will the commercial paper generate over the Treasury bills?

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

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