U.S. Government & Agency Securities
Key facts on Treasury bills, notes, bonds, TIPS, STRIPS, and agency mortgage-backed securities for the SIE.
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Questions Covered in This Set
11 cards to master
What risks do Treasury securities carry (and not carry)?
No credit/default risk (full faith and credit), but they DO have interest-rate risk and purchasing-power (inflation) risk — long maturities are especially volatile.
T-bill maturities and how interest is paid
4, 8, 13, 17, 26, and 52 weeks (1 year or less); issued at a discount with no coupon, matures at par, quoted on a discount-yield basis.
T-note vs. T-bond maturities
T-notes: 2, 3, 5, 7, 10 years. T-bonds: 20 and 30 years. Both pay semiannual coupons and are quoted in 32nds.
A T-note quoted at 101.08 equals what dollar price?
101 and 8/32 = 101.25% of par = $1,012.50 per $1,000 bond.
How do TIPS work?
Fixed coupon rate applied to a principal adjusted semiannually by the CPI, so dollar interest payments rise with inflation — the exam answer for inflation-worried investors.
What is the tax trap with TIPS and STRIPS?
Phantom income: TIPS principal adjustments and STRIPS discount accretion are taxed annually as income even though no cash is received.
What are STRIPS and who should buy them?
Zero-coupon Treasuries created by separating coupon and principal payments; ideal for target-date goals, but they have the longest duration and highest interest-rate risk.
Which mortgage issuer has full faith and credit backing?
Only Ginnie Mae (GNMA). Fannie Mae (FNMA) and Freddie Mac (FHLMC) are GSEs with only an implied guarantee, so they yield slightly more.
Key features of agency pass-through securities
Pass through homeowners' monthly principal and interest, pay monthly, traditional $25,000 GNMA minimum, and carry prepayment and extension risk.
Prepayment risk vs. extension risk
Prepayment: rates fall, homeowners refinance, you reinvest early at lower rates. Extension: rates rise, prepayments slow, your money is tied up longer.
What are CMOs?
Collateralized mortgage obligations slice MBS cash flows into tranches with different prepayment profiles; not government-guaranteed as a product and require a special risk-disclosure document.
