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

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 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

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

U.S. Treasury bonds that provide some protection from inflation by periodic adjustments of the principal value are called:

A) CPI Adjustable Bonds.

B) Inflation Linked Treasury Securities.

C) Treasury Inflation Protected Securities.

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Beginning in 1997, the U.S. Treasury began to offer Treasury Inflation Protected Securities, which are commonly known as TIPS. The principal value is periodically adjusted for changes in CPI. The periodic coupon payment, based upon the adjusted principal amount, reflects any changes in inflation.

burning0spear

The annual payment of a 20-year, semi-annual pay bond with a $5,000 par value and a 6.875% coupon rate currently trading at 89.28 is closest to:

A) $343.75.

B) $171.88.

C) $153.45.

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$5,000 × 0.06875 = $343.75.

burning0spear

Which of the following statements about U.S. Treasury Inflation Protection Securities (TIPS) is most accurate?

A) Adjustments to principal values are made annually.

B) The coupon rate is fixed for the life of the issue.

C) The inflation-adjusted principal value cannot be less than par.

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The coupon rate is set at a fixed rate determined via auction. This is called the real rate. The principal that serves as the basis of the coupon payment and the maturity value is adjusted semiannually. Because of the possibility of deflation, the adjusted principal value may be less than par (however, at maturity the Treasury redeems the bonds at the greater of the inflation-adjusted principal and the initial par value).

burning0spear

If an investor purchases a 9 ¾s 2001 Feb. $10,000 par Treasury Note at 101:11 and holds it for exactly one year, what is the rate of return if the selling price is 101:17?

A) 9.75%.

B) 8.75%.

C) 9.81%.

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Purchase price = [(101 + 11 / 32) / 100] × 10,000 = $10,134.375
Selling price = [(101 + 17 / 32) / 100] × 10,000 = $10,153.125
Interest = 9¾% of 10,000 = $975.00
Return = (Pend − Pbeg + Interest) / Pbeg = (10,153.125 − 10,134.375 + 975.00) / 10134.375 = 9.81%

burning0spear

Given that a Treasury bond has a par value of $50,000 and is currently offered at a quoted price of 98:5, what is the dollar amount that an investor must pay in order to purchase the bond?

A) $98.16.

B) $4,907,812.50.

C) $49,078.13.

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If the quoted price is 98:5 this equals 98 5/32 which equals 98.15625% and means that the dollar amount is:
0.9815625 × $50,000 = $49,078.13

burning0spear

A well-off-the-run Treasury security is best described as an issue:

A) that was traded within the last 12 months but has matured.

B) which has a yield that is out of line with similar maturity securities.

C) in a maturity range for which several more recent issues have been auctioned.

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On-the-run Treasuries are the most recent auctioned by the Treasury. When new issues are brought to market, older issues are called off-the-run issues. After a series of new issues in a given maturity spectrum, older issues of this original maturity are called well-off-the-run issues.