Exercise
Answer the following questions.
1. Most interest-paying bonds pay interest every:
A. Month
B. Three months
C. Six months
D. Year
2. An investor purchases a $1,000 TIPS note with an interest rate of 2%, and at the end of the first year, the CPI has risen to 3%. Which of the following is true?
A. The second interest payment will be $30.
B. The second interest payment will be $15.
C. The second interest payment will be $20.
D. The second interest payment will be $10.30.
3. A dealer posts a spread on Treasury notes of 103.08 – 103.16. What is the value of the spread for a $1,000 par note?
A. $.80
B. $8
C. $2.50
D. $1.25
4. Which of the following is the most likely spread for Treasury bills with a par value of $1,000?
A. 3.25% – 3.35%
B. 3.35% – 3.25%
C. 97.5 – 98.0
D. 98.0 – 97.5
5. How much would you pay for a $1,000 10-year Treasury bond priced at 95.08 (excluding accrued interest)?
A. $95.08
B. $950.80
C. $952.50
D. $1,000.00
6. All of the following are characteristics of a Treasury bill except:
A. They are sold at a discount to the par value.
B. They pay low periodic interest payments.
C. They are considered the safest of Treasury securities.
D. They have a maximum 52-week maturity.
7. Trades for U.S. Treasury securities settle:
A. The next day
B. The next business day
C. The day after the next business day
D. The third day after the next day
Answers
1. C. Most interest-paying bonds pay interest every six months; this is also known as semiannually.
2. D. At the end of the first year, the CPI has risen to 3%. This means that the Treasury will increase the $1,000 principal by 3% to $1,030. To find the amount of the second interest payment, multiply the principal by half of the interest rate (because interest is paid semiannually) ($1,030 × 1% = $10.30).
3.