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Debt > US Gov't Debt > Flashcards

US Gov't Debt Flashcards

1
Q

How does the US Govt debt auction work?

A

Weekly auction for T-Bills

Monthly auction for all other Treasuries

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2
Q

What type of Gov’t debt gets the highest rating?

A

DIRECT treasury debts

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3
Q

What are the basic characteristics of treasury bonds?

A
  • 30 year maturity
  • multiples of $100
  • quoted in 32nds
  • callable after 5 years (usually)
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4
Q

What is a treasury STRIP?

A

A bond that “STRIPS” off the coupons from the bond, leaving only the final principal payment that will occur years in the future. Each interest and principal payment becomes a zero coupon bond

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5
Q

What are TIPS?

A

Treasury Inflation protection securities. They have a FIXED interest rate, and the principal is ADJUSTED every 6 months according to the CPI

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6
Q

What is advantageous about TIPS?

A

They are not subject to purchasing power risk

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7
Q

What is the formula used to calculate TIPS return?

A

Original Rate + Inflation rate = TIPS total return

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8
Q

What are the basic characteristics of treasury NOTES?

A
  • 1 to 10 year maturity
  • multiples of 100
  • quoted in 32nds
  • NON-CALLABLE
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9
Q

What are cash management bills?

A

Several day to 6 month maturity bills that are sold on an “as needed” basis when treasury is low on cash

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10
Q

What is a bullet bond?

A

These bonds are called such because they have a bullet under the listing stating they are non-callable

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11
Q

How does FNMA generate revenue?

A

Income is derived from spread between rate at which it borrows and earns on mortgages, along with service fees

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12
Q

GNMA facts:

A

Only agency directly backed by US Gov’t.

Slightly lower yield than FNMA

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13
Q

FHLMC purpose:

A

buy conventional mortgages that don’t carry gov’t insurance or guarantee

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14
Q

What is Sallie Mae?

A

Purchases student loans

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15
Q

What is a CMO?

A

a Collateralized mortgage obligation. Fixed rate of interest over term of loan. Mortgages paid monthly

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16
Q

How does a fixed rate mortgage affect principal and interest payments?

A

In early years, payment is mostly interest. In later years, payments are mostly principa

17
Q

How are tranches created?

A

They are based upon the expected cash flows to be received over the life of the pool

18
Q

How are interest payments received on a CMO distributed?

A

They are distribute pro-rata to all tranches and pre-payments are used to retire tranches in ORDER

19
Q

How are Plain vanilla CMOs interest and principal paid out?

A

Interest is paid proportionately to ALL tranches

Principal is paid sequentially (Tranche 1, 2, 3, etc)

20
Q

How are interest payments on PAC, TAC, and Companion Tranches paid?

A

Still made pro-rata

21
Q

What is the main characteristic of a PAC (Planned amortization class)?

A
  • It protects against BOTH pre-payment and extension risk

- Principal repayments made LATER than expected are applied here

22
Q

What are the main characteristics of a companion class?

A
  • Principal repayments that are above what was required are applied here
  • Has a high level of prepayment AND extension risk
23
Q

What are the main characteristics of a TAC?

A
  • Pays a target amount of principal each month

- protects again PRE-payment risk, but not extension risk

24
Q

What are the basics behind a floating rate tranche?

A
  • They are tied to a recognized index (i.e. LIBOR)
  • have a max rate cap and floor
  • market risk in minimized (variable)
25
Q

How do prices move on a PO (principal only) security?

A

Normally - inverse of market interest (like regular bonds)

26
Q

How do prices move on an IO (interest only) security

A

Directly. Prices move in same direction as the interest rates

27
Q

Are CMO’s exempt from SEC?

A

No. They must be registered and sold with a prospectus

28
Q

Who appoints a firm as a “primary” dealer?

A

The Fed

29
Q

What happens when the fed Loosens credit?

A

It buys treasuries, causing rates to go down

30
Q

What happens when the fed tightens credit?

A

It sells treasuries, causing rates to go up

31
Q

How are government bonds settled?

A

Regular way, which for US govt. bonds is NEXT BUSINESS day after trade date

32
Q

How is accrued interest on govt. bonds computed?

A

ACTUAL day month year

33
Q

How is accrued interest on AGENCY issues computed?

A

30/360 basis

34
Q

How are discounts on T-bills and STRIPS taxed?

A

T-bills discount is taxed as interest in the year received

Discount on STRIPS is accreted and taxed annually

35
Q

How are adjustments to the principal of a TIP treated/taxed?

A

Adjusted upwards - taxable interest income

Adjusted down - deductible interest expense

Debt (6 decks)

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