burning0spear

Which of the following statements concerning U.S. Treasury securities is least accurate?

A) Treasury bonds have original maturities of 20 to 30 years.

B) Treasury notes carry no coupon.

C) Treasury Inflation Protected Securities pay a fixed coupon rate.

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T-notes are coupon-bearing instruments. TIPS pay a fixed coupon rate on a par value that is adjusted for inflation.

burning0spear

Which of the following statements regarding Treasury bills (T-bills) is CORRECT? T-bills:

A) have maturities greater than 6 months.

B) carry no coupon.

C) are considered the risk-free instrument, which means there exists no interest rate risk.

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The maturities of T-bills range from 4 weeks to 6 months. Risk-free means there is no credit risk, however, interest rate risk and price risk still exist.

burning0spear

If a U.S. Treasury bond is quoted at 92-16, the price of the bond is:

A) $92.50.

B) $92.16.

C) $925.00.

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92 − 16 = 92 16/32 = 92.5% of par value
0.925 × $1,000 = $925

burning0spear

Which reason for purchasing U.S. Treasury securities is least valid?

A) The over-the-counter secondary market for Treasury securities is very liquid.

B) Coupon strips synthesize a zero-coupon bond.

C) Treasury-bonds are available in maturities of two years to nearly 30 years.

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T-bonds are securities with maturities of more than 10 years. T-notes have maturities between two and 10 years. Coupon strips are coupon payments from a Treasury security that are sold separately as zero-coupon securities. Government securities dealers provide a continuous and highly liquid secondary market for Treasury securities.

burning0spear

Which of the following bond price calculations is NOT correct?  An investor would pay:

A) $941.00 for a $1,000 Treasury bond quoted at 94 10/32.

B) $956.25 for a $1,000 corporate bond quoted at 95 20/32.

C) $9,684.38 for a $10,000 Treasury note quoted at 96 27/32.

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Bond prices are quoted in 32nds. A quote of 94 10/32 = 94.3125%, for a price of $943.125 for a $1,000 Treasury bond.
The other calculations are correct. A quote of 96 27/32 = 96.84, for a price of $9,684.38 for a $10,000 bond. A quote of 95 20/32 = 95.625, for a price of $956.25 for a $1,000 bond.

burning0spear

Which of the following statements about primary bond markets is CORRECT? Government:

A) bills are generally for terms of two years or less.

B) bonds are generally for terms of five years or more.

C) notes are generally for terms of two to ten years.

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Bills are for one to twelve months, notes for two to ten years and bonds for ten years or more.

burning0spear

U.S. Treasury securities face several risks to varying degrees. Generally speaking, rank the following risks that an investor in a 5% coupon, 25-year, off-the-run U.S. Treasury bond, issued after 1984, would face. Order them from left to right with the least likely risk first through the most likely risk faced by the investor last.

• 1 = liquidity risk.
• 2 = prepayment risk.
• 3 = default risk.
• 4 = interest rate risk.

A) 1, 2, 3, 4.

B) 2, 3, 1, 4.

C) 3, 4, 2, 1.

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All U.S. Treasuries issued after 1984 are non-callable, so there is no prepayment risk. Treasuries are default risk free although one might argue that a long-term Treasury might have a minute level of default risk. Off-the-run Treasuries face more liquidity risk than on-the-run issues. Finally, given the long-term nature of the bond, the investor is definitely exposed to interest rate risk. Given the available alternatives, we conclude that the answer is prepayment risk, default risk, liquidity risk, and interest rate risk.

manchester88

Which of the following statements regarding U.S. Treasury securities is least accurate?

A) Due to the way Treasury STRIPS are taxed, U.S. investors may face negative cash flows before the maturity date.

B) The U.S. Treasury issues zero coupon notes, but not bonds.

C) A 5-year Treasury note can be stripped into 11 different zero coupon securities.

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The Treasury does not issue zero-coupon notes or bonds. That is why STRIPS were created. A 5-year Treasury note can be stripped into 11 zero coupon securities, consisting of its 10 coupon payments and the principal repayment. The U.S. Internal Revenue Service regards the accrued interest on a zero coupon security as income on which the security holder must pay taxes even though he has not received a cash interest payment.

manchester88

Which of the following refers to the U.S. Treasury bonds that are sold in the form of zero-coupon securities?

A) Strip-Ts.

B) Treasury calls.

C) Pass-throughs.

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The U.S. Treasury does not issue zero coupon notes and bonds, therefore investment bankers began stripping the coupons from Treasuries to create synthetic zeros to meet investor demand. The Separate Trading of Registered Interest and Principal Securities (STRIP) was introduced in 1985 to meet this need.

manchester88

Which of the following statements regarding separate trading of registered interest and principal of securities (STRIPS) is CORRECT? A 20-year Treasury bond can be used as the basis for:

A) 40 principal strips and 1 coupon strip.

B) 40 coupon strips and 1 principal strip.

C) 41 coupon strips.

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A 20-year Treasury bond can be used as the basis for 40 coupon strips and 1 principal strip.