Deck 15: Treasury and Agency Securities Markets

Question 1

Compared to the United States Treasury market, many issues in the corporate and municipal markets are ________.

A) liquid.
B) illiquid.
C) traded easily.
D) none of these

Answer 1

B

Question 2

The large volume of total debt and the large size of any single issue have contributed to making the U.S. Treasury market the most active and hence the most liquid market ________.

A) in the world.
B) in the United States.
C) in New York City.
D) on the East Coast.

Answer 2

A

Question 3

A type of government-chartered entities is ________.

A) Fannie Mae.
B) the Mississippi Valley Authority.
C) the U.S. Postal Service.
D) the Federal Home Loan Banks.

Answer 3

C

Question 4

GSE stands for ________.

A) government-sponsored entity.
B) government-sponsored enterprise.
C) government-supported enterprise.
D) government-supported entity.

Question 5

The auction for Treasury securities is conducted on a ________.

A) oligopolistic bidding basis.
B) negotiated tender basis.
C) first come first served basis.
D) competitive bidding basis.

Question 6

The U.S. Department of the Treasury ________.

A) makes the determination of the procedure for auctioning new Treasury securities.
B) does not make the determination of when to auction new Treasury securities.
C) does not make the determination what maturities to issue.
D) all of these

Question 7

Which of the below statements is FALSE?

A) Current Treasury practice is to issue all securities with maturities of one year or less as discount securities.
B) There are two categories of government securities: discount and coupon securities.
C) Treasury securities are available in book-entry form at the Federal Reserve Bank.
D) Discount securities pay interest every six months, plus principal at maturity.

Question 8

In regards to the primary dealer, which of the below statements is TRUE?

A) Any firm can deal in government securities, but in implementing its open market operations, the Federal Reserve will deal directly only with dealers that it designates as unrecognized dealers.
B) The Federal Reserve will make a reporting dealer into a primary dealer if it is convinced that the firm will continue to meet the established criteria.
C) The Federal Reserve wants to be sure that firms requesting status as primary dealers have adequate capital relative to positions assumed in Treasury securities and disregard the amount of volume in Treasury securities.
D) A reporting dealer is a firm that is taken off the Federal Reserve's regular reporting list.

Question 9

The ________ for Treasury securities is an over-the-counter market where a group of U.S. government securities dealers offer continuous bid and ask prices on outstanding Treasuries.

A) exchange market
B) primary market
C) tertiary market
D) secondary market

Question 10

Because of the possibility of disinflation (i.e., price declines), the inflation-adjusted principal at maturity may turn out to be less than ________ value. However, the Treasury has structured TIPS so that they are redeemed at the ________ the inflation-adjusted principal and the initial par value.

A) the initial par; lesser of
B) the initial par; greater of
C) the initial market; greater of
D) the initial market; lesser of

Question 11

Which of the following statements about TIPs is TRUE?

A) TIPs refer to Treasury inflation protection securities.
B) TIPs adjust for inflation.
C) The Treasury has issued TIPS that are notes and bonds.
D) All of these

Question 12

A Treasury bill with 36 days to maturity, a face value of $100,000, and selling for $99,000 would be quoted at what on a bank discount basis?

A) 5.00%
B) 7.00%
C) 8.50%
D) 10.00%

Question 13

Interest income from Treasury securities is ________.

A) subject to federal, state, and local income taxes.
B) subject to local income taxes but is exempt from federal income taxes.
C) subject to state income taxes but is exempt from federal income taxes.
D) subject to federal income taxes but is exempt from state and local income taxes.

Question 14

Two factors account for the prominent role of U.S. Treasury securities: ________.

A) volume (in terms of shares outstanding) and liquidity.
B) volume (in terms of dollars outstanding) and illiquidity.
C) volume (in terms of dollars outstanding) and liquidity.
D) volume (in terms of shares outstanding) and illiquidity.

Question 15

In regards, to the auction for Treasury securities, which of the below statements is FALSE?

A) Noncompetitive tenders may be submitted for up to a $1 million face amount and are based on quantity, not yield.
B) The auction results are determined by first deducting the total noncompetitive tenders and nonpublic purchases (such as purchases by the Federal Reserve itself) from the total securities being auctioned.
C) Bids are arranged from the lowest price to the highest price.
D) The highest yield accepted by the Treasury is referred to as the stop yield, and bidders at that yield are awarded a percentage of their total tender.

Question 16

The inflation-adjusted principal at the beginning of the period is $203,000. Suppose that the semiannual inflation rate for the next six-month period is 1%. What will be the inflation-adjusted principal at the end of the next six-month period?

A) $203,000
B) $204,030
C) $205,000
D) $205,030

Question 17

Which of the below statements is FALSE?

A) Government broker-dealers are not required to disclose the bid-ask spread on the Treasury securities that they buy from or sell to customers.
B) In the repo market, the term of the loan and the interest rate that the dealer agrees to pay (called the repo rate) are specified.
C) The advantage to the dealer of using the repo market for borrowing on a short-term basis is that the rate is greater than the cost of bank financing.
D) There is no one repo rate; rates vary from transaction to transaction depending on factors such as the term of the repo and the availability of collateral.

Question 18

The U.S. Congress has chartered entities to provide funding support for the housing and agricultural sectors of the U.S. economy, as well as to provide funding for specific U.S. government projects. The market for the debt instruments issued by these government-chartered entities is called ________.

A) the federal agency securities market.
B) the national securities market.
C) the state agency securities market.
D) the federal agency treasury market.

Question 19

Unlike primary dealers, ________ had to make large cash deposits or provide guarantees to ensure that they could fulfill their obligation to purchase the securities for which they bid.

A) nonprimary dealers
B) recognized dealers
C) reporting dealers
D) All of these

Question 20

For a 100-day Treasury bill with a face value of $100,000, if the yield on a bank discount basis is quoted as 5.00%, what is the price?

A) $99,500
B) $99,112
C) $98,611
D) None of these

Question 21

In January 1999, the structure of the government bond market changed with the start of ________ enabling the Euro government bond market to become the largest government bond market in the world in terms of size and number of issues.

A) the European Monetary Union (EMU)
B) the Russian Monetary Union (RMU)
C) the British Monetary Union (BMU)
D) the Swiss Monetary Union (SMU)

Question 22

Most central governments issue fixed-rate coupon bonds just as issued by the U.S. Department of the Treasury. Non-U.S. central governments also offer bonds with other characteristics. For example, the British government, whose bonds are referred to as gilts, offer bonds called ________. These gilts have ________ that give the holder the option to convert into a specified amount of a longer-maturity gilt (or more than one gilt) for a number of years.

A) convertibles; short maturities
B) convertibles; long maturities
C) nonconvertibles; short maturities
D) nonconvertibles; long maturities

Question 23

________, there is a regular calendar of offering where all winning bidders are awarded securities at the highest yield accepted by the government (i.e., the stop-out yield).

A) In the regular calendar auction/Dutch-style auction system
B) In the regular calendar auction/minimum-price offering system
C) In the ad hoc auction system
D) In a tap system

Question 24

The Treasury does not issue zero-coupon notes or bonds.

Question 25

Which of the below statements is FALSE?

A) The TVA was established by Congress in 1933, primarily to provide flood control, navigation, and agricultural and industrial development, and to promote the use of electric power in the Tennessee Valley region.
B) In the 1930s, Congress created a federally related institution, the Federal National Mortgage Association, popularly known as "Fannie Mae," which was charged with the responsibility to create a liquid secondary market for mortgages.
C) The Federal Agricultural Mortgage Corporation (popularly known as "Farmer Mac") provides a secondary market for first mortgage forestry land loans.
D) In 1970, Congress created the Federal Home Loan Mortgage Corporation (Freddie Mac). The reason for the creation of Freddie Mac was to provide support for conventional mortgages.

Question 26

________, governments announce auctions when prevailing market conditions appear favorable.

A) In the regular calendar auction/Dutch-style auction system
B) In the regular calendar auction/minimum-price offering system
C) In the ad hoc auction system
D) In a tap system

Question 27

If the rate on the repo is 6.5% and the rate on the reverse repo is 6.55%, the dealer firm is borrowing at 6.5% and lending at 6.55%, locking in a spread of 0.55% (fifty-five basis points).

Question 28

The purpose of ________ is to facilitate adequate, dependable credit and related services to the agricultural sector of the economy.

A) Freddie Mac
B) Fannie Mae
C) the Tennessee Valley Authority
D) the Federal Farm Credit Bank System (FFCBS)

Question 29

When the Fed buys collateral for its own account, this is called a collateral system.

Question 30

The repo rate will be slightly below the federal funds rate because a repo involves collateralized borrowing, while a federal funds transaction is unsecured borrowing.

Question 31

________ pay a fixed coupon (usually 4%) with the increase in the CPI added to the capital value of the bond and paid on maturity.

A) Fixed-indexed securities
B) Capital-indexed securities
C) Fixed-coupon securities
D) CPI securities

Question 32

________, additional bonds of a previously outstanding bond issue are auctioned where the government announces periodically that it is adding this new supply.

A) In the regular calendar auction/Dutch-style auction system
B) In the regular calendar auction/minimum-price offering system
C) In the ad hoc auction system
D) In a tap system

Question 33

________, there is a regular calendar auction and winning bidders are allocated securities at the yield (price) they bid.

A) In the regular calendar auction/Dutch-style auction system
B) In the regular calendar auction/minimum-price offering system
C) In the ad hoc auction system
D) In a tap system

Question 34

The yields on ________ government bonds are viewed as benchmark interest rates in Europe.

A) German
B) U.S.A.
C) Japan
D) England

Question 35

Which of the below statements is FALSE?

A) In the United States, the U.S. Treasury issues fixed-rate bonds and bonds (Treasury Inflation Protection Securities) whose coupon rate is indexed to the rate of inflation.
B) Obligation debt is the obligation of a country's central government.
C) Sovereign bonds are of the two general categories: economic risk (which refers to assessment of the ability of a government to satisfy its obligations) and political risk (which refers to assessment of the willingness of a government to satisfy its obligations).
D) The reason for distinguishing between local debt ratings and foreign currency debt ratings is that historically, the default frequency differs by the currency denomination of the debt.

Question 36

________ consists of the 12 district Federal Home Loan Banks and their member banks.

A) The Federal Agricultural Mortgage Corporation
B) Fannie Mae
C) The Federal Home Loan Bank System (FHLBanks)
D) The Federal Farm Credit Bank System (FFCBS)

Question 37

The process of separating each coupon payment, as well as the principal (called the corpus), and selling securities against them is referred to as coupon separating.

Question 38

The GSEs issue two types of securities: debentures and mortgage-backed securities ________.

A) indentures and auto-backed securities.
B) debentures and auto-backed securities.
C) indentures and mortgage-backed securities.
D) debentures and mortgage-backed securities.

Question 39

There are four methods that have been used in distributing new securities of central governments. Which of the below is NOT one of these?

A) One of these is the regular calendar auction/Dutch-style system.
B) One of these is the ad hoc auction system.
C) One of these is the top system/maximum-price offering system.
D) One of these is the regular calendar auction/minimum-price offering system.

Question 40

All individual countries considered, the largest government bond markets outside of the United States is ________.

A) Italy.
B) Germany
C) France.
D) Japan.

Question 41

Rather than representing a share of the trust as the trademarks do, Treasury receipts (TRs) represent ownership of a Treasury security.

Question 42

A significant depreciation of the local currency relative to a foreign currency in which a debt obligation is denominated will impair a national government's ability to satisfy such obligation.

Question 43

The Chinese bond market is the largest government bond market in the world.

Question 44

Sovereign debt is the obligation of a country's central government.

Question 45

The federal agency securities market is the market for securities issued by U.S. government-chartered entities to provide funding support for the housing and agricultural sectors of the U.S. economy, as well as to provide funding for specific U.S. government projects.

Question 46

The GSEs issue debentures and mortgage-backed securities and these securities are backed by the full faith and credit of the U.S. government.

Question 47

Describe the types of issued by non-U.S. central governments such as the British government and the Canadian government.

Question 48

Describe two types of government-chartered entities.

Question 49

A government-chartered entity is classified as either a government-owned corporation or a government-sponsored enterprise (GSE).

Question 50

In assessing the credit quality of local currency debt, S&P emphasizes foreign government policies that foster or impede timely debt service.

Question 51

The index-linked gilts offered by the British government have coupons and final redemption amounts linked to the General Index of Retail Price (RPI), an index which is released each month by the Central Statistical Office.

Question 52

What is the reason for distinguishing between local debt ratings and foreign currency debt ratings?

Question 53

Financial theory tells us that the theoretical value of a Treasury security should be equal to the present value of the cash flow where each cash flow is discounted at the appropriate theoretical spot rate.

Question 54

Illustrate the process of stripping.

Question 55

An advantage of a taxable entity investing in Treasury strips is that accrued interest is taxed each year even though interest is not paid.

Question 56

Stripped Treasury securities are zero-coupon instruments that, while not issued by the U.S. government, are backed by Treasury securities from which they are created.