Exercise

Answer the following questions.

1. Most interest-paying bonds pay interest every:

A. Month

B. 3 months

C. 6 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. For a $1,000 par note, what is the value of the spread?

A. $0.80

B. $8

C. $2.50

D. $1.25

4. Which of the following is the most likely to be a spread of 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 x 1% = $10.30).

3