Chapter 15 Government Securities
TRUE/FALSE
default risk because the government has the power to tax
and to create money.
securities such as treasury bills.
funds of savers with modest sums to invest.
federal income taxation.
exempt from state income taxation.
matures in less than five years.
securities sold at a discount.
secondary markets like corporate bonds.
securities are fixed and do not change with changes in
interest rates.
strategy would be to sell treasury bills and buy treasury
bonds.
risk associated with inflation.
changes in interest rates.
to issue bonds.
interest and principal repayments.
bond should increase.
timing and amount of each payment is known.
Ginnie Mae bond is reduced.
in classes (“tranches”) that increase the certainty of the
timing of payments.
bracket and can earn 5 percent on a corporate bond, then 3
percent on a municipal bond is attractive.
poor quality corporate debt.
and federal government bonds.
authority of the issuing government.
Reserve.
investments because they may be readily sold with little
chance of loss.
insured in order to facilitate marketing (issue) them.
interest rates decline.
bonds with the same term to maturity and credit rating.
not necessarily from state income taxation.
from federal income taxation.
MULTIPLE CHOICE
issued by the federal government?
a. money market securities
b. long–term bonds
c. stock
d. zero coupon bonds
a. is exempt from federal income taxation
b. is distributed semi–annually
c. is exempt from state income taxation
d. is taxed even though it is not received
until the bond is redeemed
markets?
a. U.S. Treasury bills
b. U.S. Treasury bonds
c. series EE bonds
d. municipal bonds
a. sell at a discount
b. sell for a premium
c. pay an established 4.5% annual interest
d. mature after one year
government bonds include
1. reinvestment rate risk
2. risk of inflation
3. interest rate risk
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
a. long–term bonds issued by the federal government
b. short–term, mortgage–backed securities
c. mortgage backed securities issued by the
Government National Mortgage Association
d. long–term mortgage securities sold by banks
1. the price of a Ginnie Mae falls
2. the price of a Ginnie Mae rises
3. the speed with which Ginnie Maes are
retired increases
4. the speed with which Ginnie Maes are
retired declines
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
a. are free of interest rate risk
b. have certain repayment schedules
c. are not exempt from federal income taxation
d. increase in value when interest rates rise
a. pay more interest than corporate debt
b. are exempt from federal income taxation
c. are exempt from federal estate taxation
d. reduce interest rate risk
bracket and corporate debt yields 7.5 percent,
then to be competitive municipal debt must yield
at least
a. 11.54%
b. 7.59%
c. 4.88%
d. 2.63%
a. illustrative of a revenue bond
b. not illustrative of a tax–exempt bond
c. supported by taxing authority
d. secured by property
include
1. fluctuations in interest rates
2. reinvestment rate risk
3. default risk
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
PROBLEMS
1. You purchase a three–month discount security (e.g., a
Treasury bill or commercial paper) for $0.9878 on $1 (i.e.,
$98,780 for $100,000 face amount). What are the discount
yield, the simple annual yield, and the annual compound
yield earned by the investment?
2. What is the value of a $1,000 zero coupon government
bond that matures after eight years, if comparable yields
are 7%?
3. If an investor is in the 28 percent federal income tax
bracket, which bond is to be preferred?
a. Single A, ten-year corporate bond yielding 6.5%
b. Single A, ten-year municipal bond yielding 3.1%
4. A portfolio manager is considering buying $100,000 worth
of treasury bills for $98,211 versus $100,000 worth of
commercial paper for $97,897. Both securities will mature
in nine months. How much additional return will the
commercial paper generate over the Treasury bills?
5. A homeowner has been offered three alternative mortgage
loans to finance the purchase of a $300,000 house. The
interest rate on the first alternative is 8 percent for
twenty–five years, and the loan requires a 20 percent down
payment. The second mortgage loan is also for twenty–five
years with an interest rate of 7 percent but requires a
down payment of a third of the cost of the house. The third
loan also requires a third down but is for 20 years at 6
percent. What are the annual mortgage payments required by
each loan?
6. What is the repayment schedule for the first three years
of a $60,000 mortgage loan at 8 percent for twenty–five
years? (Assume that payments are made annually.)
SOLUTIONS TO PROBLEMS
