SERIES 7 – DEBT Test Questions

SERIES 7 – DEBT Test Questions U.S. Government debt is sold by _____________ bidding at a weekly auction conducted by the _________________ where ____________ are sold. - Sold by COMPETITIVE bidding at a weekly auction conducted by the FEDERAL RESERVE where TREASURY BILLS are sold. (This is by far, the largest amount of debt issued by the government.) Every ________ weeks, Notes, Bonds, and TIPS are sold at auction. - Every 4 weeks. (The actual amount of debt for sale at each auction depends on the financing needs of the government.) Is debt that is issued by agencies of the U.S. Government directly backed by the Government's promise to pay? - No. it is not. Instead, there is an implicit promise on the part of the government to pay if the debt defaults. Is the ONLY Government agency debt that is directly backed by the U.S. Government: - Government National Mortgage Association ( Ginnie Mae). Form of U.S. Government debt: That are: 1. Long-term 2. Issued with maturities of 30 years 3. Quoted as a percentage of par 4. Quoted in minimum increments of 1/32nd's 5. Issued in minimum denominations of $ 100 6. Pay interest semi-annually 7. Are non-callable - Treasury Bond What type of risk do STRIPS avoid? - Reinvestment Risk What type of risk do TIPS avoid? - Purchasing Power Risk Form of U.S. Government debt. That is: 1. A zero-coupon treasury obligation 2. Are sold at a significant discount to face value 3. Final principal payment occurs at maturity 4. Mature at par 5. Offer NO interest payments - Treasury STRIPS This investment, is designed for pension fund managers who want a safe, long term investment and who do not want to worry about having to reinvest semi-annual interest payments that could be subject to reinvestment risk ( if market interest rates fall during this time period). - Treasury STRIPS Type of U.S. Government debt. That are: 1. Have a fixed interest rate over the life of the bond 2. The principal amount is adjusted every 6 months by an amount equal to the change in the Consumer Price Index. 3. Pays interest semi-annually 4. The interest amount ( the fixed rate X the adjusted principal amount) will increase if the principal amount is adjusted upwards due to inflation 5. And, the interest amount, will decrease if the principal amount is decreased due to deflation. ( So, the interest payments adjust to inflation.) 6. If the principal amount is adjusted upwards due to inflation, the bondholder receives the higher amount at maturity. 7. If the principal amount is decreased due to deflation, the bondholder will always receive par at maturity. 8. Thus, is protected from purchasing power risk. 9. Have a lower interest rate than similar maturity regular Treasury issues because of this inflation protection feature. 10. Your return each year will be the "real interest rate" plus an additional return equal to that year's inflation rate. - TIPS ( Treasury Inflation Protected Security) TIPS Example: If you buy a 3% TIPS, and say, inflation rises to 1% in 2018, the TIPS return for that year will be 3% real rate + the 1% inflation rate for that year = 4% total return. ( The 3% us received as interest, while the inflation component is added to the principal amount of the bond.) - TIPS Example and Explanation Thus, as inflation rises. the return rises. and the TIPS price will not fall. Type of U.S. Government treasury debt security. That are: 1. Intermediate-term securities 2. Issued with maturities ranging from over 1 year to 10 years. 3. Issued in minimum denominations of $100 par value 4. Pay interest semi-annually 5. non-callable 6. Quoted as a percentage of par 7. Quoted in 32nds. - Treasury Notes type of U.S. Government debt. That are: 1. Short-term securities 2. Issued with 1, 3, 6 and 12 month maturities 3. Maturities should also be known as 4, 13, 26, and 52 weeks. 4. Issued at a discount to par 5. The interest earned is considered