Ch 6 - US government debt Flashcards
(39 cards)
US Government
Largest and most active securities issuer in the world
Primarily funds activities through deficit spending (borrowing more money than it brings in)
US Department of Treasury
Runs finances of the US Government
US Government debt denominations
Minimum of $100
Treasury bills
Short-term zero coupon debt
Generally issued on a weekly basis
*1 year T-bill issued monthly
Issued at discounts and mature at par
Available maturities:
*One month (4 weeks)
*Two months (8 weeks)
*Three months (13 weeks)
*Four months (17 weeks)
*Six months (26 weeks)
*One year (52 weeks)
Cash management bills (CMBs)
Short-term, zero coupon treasury securities
Issued to close short-term funding gaps
Maturities as short as one day
Treasury notes
2-10 year maturities
Pay interest semi-annually
Generally issued on a monthly basis
Treasury bonds
Up to 30-year maturities
Pay interest semi-annually
Generally issued on a quarterly basis
STRIPS stands for Separate Trading of Registered Interest and Principal of Securities
Issued by US Government
Long-term zero coupon bonds
Treasury Receipts
Issued by financial institutions
Long-term zero coupon bonds
financial institutions purchase sets of Treasury Notes and Treasury Bonds, place them into a portfolio, strip them of their coupons, and re-sell them as zero coupon bonds.
STRIPS and Treasury Receipts
Not suitable for investors seeking income
Subject to phantom taxes
High price volatility
Very susceptible to interest rate risk （due to they have 0% interest rate）
Treasury Inflation Protected Securities (TIPS)
inflation-adjusting debt securities
Principal (par) value adjusts to CPI
Coupon % stays fixed (but adjust accordingly to the adjusted PAR)
Issued in 5, 10, and 30-year maturities
Investor receives greater of original par or adjusted par at maturity
Agency bonds
agency = Federal agencies, sometimes referred to as government-sponsored enterprises (GSEs)
Indirectly backed by US Government
Subject to some default risk
Federal Farm Credit System
Provides financing to American farmers
Mortgage agencies
Issue mortgage-backed securities
Buy mortgages from financial institutions
Ginnie Mae (GNMA)
Guarantees VA and FHA insured mortgages
Directly backed by US Government
Fannie Mae (FNMA)
Purchases insured (VA, FHA) and conventional mortgages
Indirectly backed by US Government
Publicly owned and traded
Freddie Mac (FHLMC)
Purchases conventional mortgages
Indirectly backed by US Government
Publicly owned and traded
Mortgage-backed securities
Make monthly payments of interest and principal
Subject to prepayment and extension risk
Interest is fully taxable
nots not change as much as traditional fix-maturity bonds when interest changes
Prepayment risk
Occurs when interest rates fall
Homeowners pay off mortgages earlier than expected
Extension risk
Occurs when interest rates rise
Homeowners pay off mortgages later than expected
MBS taxation
Subject to full taxation (fed, state, local)
Collateralized mortgage obligations (CMOs)
structured and issued by private financial institutions.
Pass through certificate PTC purchased from mortgage agencyes (GN FN, FM) repackaged into tranches
Issued in $1,000 denominations
Fully-taxable interest
Interest is paid on a pro-rata basis （equal portions）& paid monthly
Principal is paid on a sequential basis
Reduce prepayment and extension risk
Typically AAA rated
Plain vanilla CMO
Traditional version of CMO
Tranches are retired sequentially (A front-end tranche receives all principal immediately and is the first investor to receive all of their principal back.)
Planned amortization class (PAC)
Utilizes companion classes to reduce risk
Reduced prepayment and extension risk
companion class – > PAC –> companion class
companion class protects PAC
