US Treasury Trading - Treasury Notes, Bonds

The following are trading examples of treasury notes, bonds , strips and other US Government based securities trades.

A customer places an order to buy ten 4% US Treasury Notes on Monday August 3rd for regular way settlement. This trade will settle on:

A) Monday August 3rd
B) Tuesday August 4th
C) Wednesday August 5th
D) Thursday August 6th

B: All US Government Securities, including Treasury Notes, settle on the next business day. This trade will settle on Tuesday August 4th.

Treasury Notes pay interest:

A) Monthly
B) Semi annually
C) Quarterly
D) At maturity


B: Treasury notes and treasury bonds pay interest semi annually. Treasury bills are non interest bearing and pay par value at maturity.

A customer wants to invest in a bond that has the least amount of reinvestment risk. Which of the following would be the most appropriate?

A) Treasury bond
B) Treasury note
C) Treasury STRIP
D) None of the above

C: Reinvestment risk occurs with income paying investments that are reinvested into lower paying vehicles. Treasury STRIPs are zero coupon bonds issued by the US Government. They do not pay any income or interest during the term of the bond. There would be no reinvestment risk, since there is no income to reinvestment.

Bond Investing Books

Callable Bonds, Accrued Interest, 0 Coupon

Assuming all of the following bonds from the same issuer are callable now, which one would most likely get called first?

A) 8% maturing 1-15-2016
B) 8% maturing 1-15-2006
C) 4% maturing 1-15-2012
D) 4% maturing 1-15-2006

A: Bonds with the highest coupon rates would be the first to most likely get called. The issuer will look to issue new debt at a lower rate. Since there are two 8% bonds, the one that would most likely get called, would be the issue with the longest maturity. This is because the bond is potentially more expensive with the amount of years it has compared to the shorter one.

A customer sells a 6% corporate bond on Tuesday October 4th for regular way settlement. The bond pays interest on July 1st and January 1st. How many days of accrued interest is this customer owed?

A) 98
B) 97
C) 96
D) 57

C: Accrued interest is the interest that is due a seller of a bond since the last day they were paid. Corporate bonds pay on a 30 day month/360 day year. They also settle on the 3rd business day following the trade date (T+3). The trade settles on Friday October 7th. The last pay date was July 1st. The customer is owed 30 days for July, 30 days for August , 30 days for September and 6 days for October. You do not include the settlement date of the 7th.

Which of the following debt securities are direct obligations of the U.S. Government?

A) GNMA
B) FNMA
C) Commercial paper
D) Secured corporate bonds


Correct answer is A: Government National Mortgage Association (GNMA) is a direct obligation of the Government. FNMA is a private agency. Commercial paper and all corporate debt are only guaranteed by the issuing company.

Which of the following securities have initial maturities of one year or less?

I Treasury notes
II Treasury bills
III Commercial paper
IV Treasury stock

A) I and IV
B) I, II and III
C) II and III
D) I, II and IV

C: Treasury bills have initial maturities of 1 month, 3 months and 6 months. Commercial paper has maturities of 270 days or less. Treasury notes have maturities out to two years. Treasury stock is not a debt security and has no maturity.

Zero coupon bonds pay interest:

A) At maturity
B) Semi annual
C) Monthly
D) None of the above

D: 0 Coupon bonds do not pay interest at all. The rate of return is based on the discount price that is paid, and the par that is received at maturity.


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Yield Curve - Positive, Inverted Treasury Bond Curve

The current yield curve measures where short term and long term interest rates are currently trading. This curve is comprised of US Treasury securities.

A positive or ascending yield curve is when short term yields are lower than long term treasury yields. This normally how an interest rate curve shoudl look during most normal economic conditions

Inverted

Sometimes interest rates may be trading where the yield curve is inverted. This means that short term interest rates are trading higher than longer term yields.

If the Federal Reserve Board (FRB) agressively tightens short term money (lowers interest rates), then short term rates can rise - creating a possible inverted curve.

Most other bonds and debt securities are proced off of current treasury rates. Corporate and other bonds are priced "above treasuries". Treasuries have the least amount of credit risk, so other bonds will always trade higher and above the current yield curve, creating a yield spread.