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Unit 2 > US gov debt > Flashcards

US gov debt Flashcards

1
Q

Do US gov bonds have high or low liquidity risk?

A

low liquidity risk

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2
Q

Why does the US gov have a lack of default risk?

A

Because they can make their own money

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3
Q

What is the US gov debt backed by?

A

Full and direct backing of the federal gov

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4
Q

Which risk is US gov bonds completely devoid of?

A

default risk

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5
Q

What is the unique minimum denomination of treasury securities?

A

100$

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6
Q

What are the 5 treasury products primarily used to finance federal gov?

A
  1. T bills
  2. T notes
  3. T bonds
  4. STRIPS
  5. TIPS
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7
Q

Are treasury bills short term or long?

A

short

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8
Q

What is the auction frequency of T bills?

A

weekly

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9
Q

What is the auction frequency of all treasury products other than T Bills

A

Monthly

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10
Q

What are the six maturity frequencies treasury bills are offered?

A
  1. one month
  2. two months
  3. three months
  4. four months
  5. six months
  6. one year
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11
Q

Are treasury bills issued at discounts or premiums and why?

A

discounts because they are zero coupon

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12
Q

When do t bills pay interest? How does this differ from other bonds?

A

T bills pay interest at maturity whereas others do semi-anually

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13
Q

When are T notes auctioned?

A

Monthly

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14
Q

When do T notes pay interest?

A

semi-anually

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15
Q

When do T notes mature between?

A

2 and 10 years

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16
Q

What -term are T notes?

A

intermediate

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17
Q

What -term are T bonds?

A

long-term

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18
Q

When do T bonds mature?

A

30 years

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19
Q

Are STRIPS long term or short term? How long?

A

Long term, 30 years

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20
Q

Why are STRIPS issued at deep discounts?

A

Because your return doesn’t come back for 30 years

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21
Q

Four steps to create Treasury receipts?

A
  1. Financial institutions purchase sets of T notes and T bonds
  2. Place them into portfolio
  3. Strip them of their coupons
  4. Re-sell them as zero coupon bonds
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22
Q

How do treasury receipts differ from STRIPS?

A

They are created by financial institutions, not US GOV

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23
Q

How does the risk of Treasury receipts compare to US bonds?

A

US bonds have no default risk, Treasury receipts do because they are creations of financial institutions

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24
Q

When are treasury receipts and STRIPS taxed?

A

Anually

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25
Q

What is phantom tax?

A

When STRIPS and Treasury receipts are taxed annually so you pay throughout their life before they mature

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26
Q

When would an investor invest in TIPS?

A

When the stock market is too risky with inflation risk

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27
Q

What do TIPS do to combat inflation rise?

A

They adjust their interest rates payments to make them higher if inflation goes up by increasing par

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28
Q

What are the values of TIPS adjusted against?

A

Consumer Price Index

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29
Q

What are the three maturities TIPS are issued at

A
  1. 5
  2. 10
  3. 15
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30
Q

How are the interest rates adjusted in tips?

A

The par values change instead of the coupon rate

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31
Q

What par value do TIPS receive at maturity even though the par flucuates?

A

The greater of the original par value

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32
Q

Treasury bills are what type of coupon?

A

zero coupon

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33
Q

What type of treasury products are not suitable for investors seeking income and why?

A

STRIPS and Treasury receipts because they are zero coupon

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34
Q

What type of bonds move the fastest with interest rates change?

A

long maturity and low coupon

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35
Q

Why are treasury receipts very volatile?

A

Becaue they have long maturities and low coupons

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36
Q

What risk are STRIPS and treasury receipts very subject to?

A

interest rate risk

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37
Q

What does the principal adjust to for TIPS?

A

Adjusts to the CPI

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38
Q

What is funded debt?

A

Long term corporate debt

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39
Q

Are T bills secured or unsecured?

A

They are unsecured with no collateral

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40
Q

What type of securities are t bills when they mature in 1 year?

A

money market debt

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41
Q

What treasury security has the highest inflation risk and why?

A

Treasury bonds because they are very long term

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42
Q

What does it mean to trade flat?

A

There is no accrued interest

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43
Q

Which two securities have phantom tax?

A

STRIPS and treasury receipts

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44
Q

What are three treasury securities that trade flat?

A
  1. t bills
  2. STRIPS
  3. treasury receipts
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45
Q

How often are phantom taxes paid on STRIPS?

A

anually

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46
Q

What is the dual mandate of the federal reserve?

A
  1. encouraging economic growth
  2. Managing inflation levels
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47
Q

What is economic growth measured by?

A

GDP and GNP

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48
Q

What is the difference between GDP and GNP

A

GDP = all goods and services within country’s borders

GNP = Includes goods and services by residents that live temporarily in a different country

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49
Q

What are GDP and GNP measured in?

A

Constant dollars

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50
Q

What does constant dollars mean?

A

The reported data is inflation-adjusted

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51
Q
A
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52
Q

What counts as a recession?

A

Two consecutive quarters of GDP decline

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53
Q

What counts as depression?

A

six straight quarters of GDP decline

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54
Q

What does it mean if a company good or services is price elastic?

A

describes that their demand is flexible

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55
Q

What is an inelastic good or service?

A

Service or good where demand usually doesn’t fall

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56
Q

What type of goods or services are inelastic?

A

Something people can’t live without or has no com

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57
Q

What four loosening policies the gov would do if the economy is shrinking?

A
  1. lower discount rate
  2. engage in repurchase agreements with banks
  3. Lower bank reserve requirements
  4. Lower regulation T (margin rules)
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58
Q

What describes loosening policies?

A

Aim to increase the supply of money

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59
Q

What are two characteristics of elastic goods or service?

A
  1. demand falls drastically as price rises
  2. not necessity or has competition
60
Q

When does the fed do loosening policies?

A

When GDP declines

61
Q

What three things does an economic peak involve?

A
  1. low interest rates
  2. high GDP/GNP levels
  3. low unemployment levels
62
Q

What are three things economic troughs involve?

A
  1. low interest rates
  2. low GDP/GNP levels
  3. high unemployment
63
Q

When does CPI rise?

A

If prices increase

64
Q

WHen would the gov inact tightening policies?

A

When there is higher inflation

65
Q

What are 4 tightening policies to reduce inflation?

A
  1. raise discount rate
  2. Engage in reverse repurchase agreements with banks
  3. Raise bank reserve requirements
  4. Raise Regulation T
66
Q

What is the relationship between money supply and interest rates?

A

Lower money supply, higher interest rates

Higher money supply,
lower interest rates

67
Q

What are yield curves?

A

THey display yields of similar debt securities across multiple maturities

68
Q

Why would an investor change from short term securities to long term securities before times of recession?

A

In order to lock in higher coupons

69
Q

What is a credit yield spread?

A

Juxtaposes two different sets of yield curves

70
Q

What do comparative yield curves measure?

A

The difference between the two yield curves

71
Q

What is the monetarist theory?

A

Fed’s actions are most significant economic influence

72
Q

What do standard yield curves show?

A

Securities with shorter maturities maintain lower yields than long term maturities

73
Q

What market sentiment does flat yield curve indicate?

A

Uncertaintiy in bond market

74
Q

What is the relationship in yields between short term and long term debt securities in a flat yield curve?

A

Same yield

75
Q

What is the relationship between demand for short and long term securities and price and yield?

A

Less dmand for short term seccurities = lower prices and higher yields

More demand for long term securities = higher prices and lower yields

76
Q

What do investors do that creates a flat yield curve?

A

Liquidate their short-term debt securities and buy longer term bonds

77
Q

What does an inverted yield curve indicate?

A

A pending recession

78
Q

What is the relationship in yields between short-term and long term debt securities with inverted yield curve?

A

Short term debt securities maintain higher yields than long term

79
Q

What do investors do with their short-term debt securities ahead of a recession?

A

They liquidate short term and enter longer-term bonds

80
Q

2 reasons why do investors move money from short-term to long term in expectation of a recession?

A

Because they can lock in higher interest rates for long periods while interest rates decline

Bond prices rise when interest rates fall, providing capital appreciation potential

81
Q

What comparative yield signals economic depression?

A

Widening of US Corp and US Gov yield curves

82
Q

Which directions do Corp and Gov yields go signaling economic recession?

A

Further apart

83
Q

Why is there deccreased demand in corporate investments ahead of a recession?

A

Because they are more risky than us government securities

84
Q

What does the decreased demand of corporate bonds do to their prices and yields?

A

Drive down prices and raises yields

85
Q

What does the increased demand for us gov bonds do to prices and yields?

A

Drives up prices and lowers yields

86
Q

What type of comparative yield curve signals economic depression?

A

Widening

87
Q

What type of comparative yield curve signals economic expansion?

A

Narrowing

88
Q

What are investors buying in times of economic prosperity in relation to yield curves?

A

Liquidating safer US gov bonds and buying riskier corporate bonds

89
Q

What does the decreased demand for us gov securities do to prices and yields?

A

Drives up prices and lowers yields

90
Q

What does the increased demand for corporate securities do to prices and yields?

A

Drives down prices and heightens yields

91
Q

What are the 6 most common leading indicators?

A
  1. S&P 500
  2. average weekly initial claims for unemployment
  3. index of new manufacturing orders
  4. number of new building permits
  5. consumer confidence index
  6. interest rate spread between 10 year t notes and fed fuds rate
92
Q

What is the interest rate spread between 10 year t notes and. thefederal funds rate a good predictor of?

A

Economic decclines

93
Q

What is the relationship between 10 year t notes and federal funds that indicates recession?

A

T notes interest rates fall below federal funds rate

94
Q

What do coincident indicators provide?

A

Insight into the economy’s current, not future strength

95
Q

What are 6 coincidence indicators?

A
  1. number of employees on non farm payrolls
  2. average hours worked
  3. personal income levels
  4. industrial production levels
  5. manufacturing sales
  6. unemployment rate
96
Q

What does a lagging indicator provide?

A

Insight into the economy’s past performance

97
Q

4 most commonly cited lagging indicators?

A
  1. Changes in CPI levels
  2. Corporate profits
  3. Change in labor cost per unit of output
  4. Average duration. ofunemployment
98
Q

How do unemployment claims differ to make them lagging, leading, or coincidence

A

Initial unemployment = leading indicator

unemployment rate = coincident indicator

duration of unemployment = lagging indicator

99
Q

What are four economic market structures?

A
  1. perfect competition
  2. monopolistic competition
  3. oligopoly
  4. monopoly
100
Q

What do perfect competition structures invollve?

A

Many buyers and sellers of virtually identical products

101
Q

What is a good example of a perfect competition and why?

A

Farmers market because they offer same products and prices are primary factor determining demand

102
Q

What is the relationship between perfect competition and price influence power?

A

Nobody dominates the market with the power to influence prices upwards or downwards

103
Q

How does monopolistic competition differ from perfect competition?

A

but consumer demand is not strictly price related but due to unique features between products

104
Q

Why would one vendor attempting to manipulate the price not work in monopolistic competition?

A

Because of the large number different products or services available

105
Q

What is the difference between perfect competition and monopolistic competition in regard to demand?

A

In a farmers market the cheapest apple will have the highest demand, but chip aisle, there is more in play with demand than just price

106
Q

What buyer to seller ratio structure do oligopolies involve

A

many buyers but a limited amount of sellers

107
Q

Why do oligopoly have few vendors?

A

Market entry cost

108
Q

What buyer to seller ratio structure do monopolies involve

A

Many different buyers, but only one seller

109
Q

What is the relationship between demand and price for elastic goods?

A

Demand falls drastically. as price rises

110
Q

What type of policies does fed enact with high inflation?

A

tightening money supplies

111
Q

Yield short term vs. long term in all three curves?

A

Normal = short term < long term
Flat = short term = long term
inverted = Short term > long term

112
Q

What is the primary demand factor for perfection competition?

A

price

113
Q

Which two market structures are price manipulation hard?

A

perfect competition and monopolistic competition

114
Q

Which two market structures are price manipulation easy?

A

Oligopoly and monopoly

115
Q

What will the federal reserve do to interest rates to combat inflation?

A

raise interest rates

116
Q

How does increasing interest rates combat inflation?

A

Reduces economic activity

117
Q

Who measures the CPI?

A

US Bureau of Labor Stastics

118
Q

What does the CPI measure?

A

price changes of goods and services

119
Q

What two entities implement fiscal policies?

A
  1. congress
  2. president
120
Q

What do fiscal policies focus on two things?

A
  1. how government collects
  2. how government spends
121
Q

What three roles does IRS fufill?

A
  1. collecting taxes
  2. providing assistance to taxpayers
  3. investigating fraud
122
Q

When does a levy occur?

A

When the IRS places a hold on a property to satisfy a debt

123
Q

Who is the IRS an agency of?

A

US Department of T

124
Q

What is the lowest federal income tax bracket?

A

10 percent

125
Q

What is the highest income tax bracket?

A

37

126
Q

What are three types of progressive tax systems?

A
  1. personal income
  2. estate
  3. gift
127
Q

In a progressive tax system, who. is subject to lower taxes?

A

people with less money

128
Q

What describes a regressive tax system?

A

Same regardless of income levels or amount of money involved

129
Q

What are two examples of regressive tax?

A
  1. sales tax
  2. exise tax
130
Q

What does kensyian theory state?

A

increased government spending drives economy’s growth

131
Q

What should the government do in a recession according to keynes and 2 reasons why why?

A

spend immense amounts of money to
1. drive up demand for certain goods and services while
2. increasing employmentAc

132
Q

According to keynes, when should the government increase and decrease tax rates and why?

A

Increase during inflation to stabilize prices

Decrease during recession to incentivize people to spend more money

133
Q

What is supply side theory the opposite of?

A

Keynesian theory

134
Q

2 ways: How does supply side theory encourage gorwing supply of goods and services?

A
  1. Through reduced taxation
  2. reduced government spending
135
Q

What belief is the primary difference between supply side and keynesian theory?

A

What drives economic activity

136
Q

Demand side proponents believe demand for goods and services come from what?

A

The government

137
Q

Supply side proponents believe demand for goods and services come from what?

A

Private business sector

138
Q

Two types of policy utilized by gov to influence economy?

A
  1. fiscal
  2. monetary
139
Q

Who controls fiscal policy vs. monetary policy?

A

Fiscal = congress and president
Monetary = federal reserve

140
Q

What is the relationship between government spending and keynesian vs. supply side theory?

A

Supply side = decreased gov spending benefits economy
Keynesian = increased vo spending benefits economy

141
Q

What two things does the federal reserve do in a recession?

A
  1. increase (loosen) money supply
  2. Bring interest rates down?
142
Q

What to things does the federal reserve do in inflationary environment?

A
  1. decrease (tighten) money supply
  2. Bring interest rates up
143
Q

What does fiscal policy relate to?

A

Taxation and gov spending

144
Q

Relationship between gov spending and tax rates in a recession
in keynseian theory?

A

Gov spending incdreases
Tax rates fall

145
Q

Relationship between gov spending and tax rates in inflation environment in keynseian theory?

A

Govt spending decreases
tax rates rise

146
Q
A

Unit 2 (18 decks)

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