Exam 15: Government Securities

Municipal general obligation bonds are

Poor quality municipal bonds pay more interest than poor quality corporate debt.

A revenue bond is supported by the taxation authority of the issuing government.

The owner of a Ginnie Mae bond receives monthly both interest and principal repayments.

Realized returns on all federal government securities are fixed and do not change with changes in interest rates.

If an investor is in the 24 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%

There is no secondary market for EE bonds.

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? Assume a 360-day year.

Treasury bills are sold for a premium.

What is the value of a $1,000 zero coupon government bond that matures after eight years, if comparable yields are 7%?

If an investor is in the 22 percent income tax bracket and can earn 5 percent on a corporate bond, then 3 percent on a municipal bond is attractive.

Ginnie Mae bonds are secured by private mortgages.

Sources of risk to investors in municipal bonds include 1. fluctuations in interest rates 2. reinvestment rate risk 3. default risk

Since Ginnie Mae bonds are debt instruments, the timing and amount of each payment is known.

Collateralized mortgage obligations (CMOs)

If interest rates decline, the expected life of a Ginnie Mae bond is reduced.

The price of a municipal bond will tend to rise when interest rates decline.

The interest on series EE bonds

The interest earned on the federal government's debt is exempt from state income taxation.

Treasury bonds may be bought and sold in the secondary markets like corporate bonds.