Chapter 7: U.s. Government And Money-Market Securities

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Marketable Treasuries

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Treasury Bonds
Treasury Notes
Treasury Bills
Treasury STRIPS
Treasury TIPS
Treasury CMBs

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Treasury Notes (T-notes)

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A marketable, U.S. government debt security with a fixed interest rate and a maturity between one and 10 years. T-notes can be bought either directly from the U.S. government or through a bank.

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Treasury Bills

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A short-term debt obligation backed by the U.S. government with a maturity of less than one year. T-bills are sold in denominations of $1,000 up to a maximum purchase of $5 million and commonly have maturities of one month (four weeks), three months (13 weeks) or six months (26 weeks).

T-bills are issued through a competitive bidding process at a discount from par, which means that rather than paying fixed interest payments like conventional bonds, the appreciation of the bond provides the return to the holder.

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Treasury STRIPS

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An acronym for 'separate trading of registered interest and principal securities'. Treasury STRIPS are fixed-income securities sold at a significant discount to face value and offer no interest payments because they mature at par.

Backed by the U.S. government, STRIPS, which were first introduced in 1985, offer minimal risk and some tax benefits in certain states, replacing TIGRs and CATS as the dominant zero-coupon U.S. security.

Although you receive no tangible income, you typically still have to pay federal income tax on the bond's accretion for the year.

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Treasury Bonds

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A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. The bonds make interest payments semi-annually and the income that holders receive is only taxed at the federal level.

Treasury bonds are issued with a minimum denomination of $1,000. The bonds are initially sold through auction in which the maximum purchase amount is $5 million if the bid is non-competitive or 35% of the offering if the bid is competitive. A competitive bid states the rate that the bidder is willing to accept; it will be accepted depending on how it compares to the set rate of the bond. A non-competitive bid ensures that the bidder will get the bond but he or she will have to accept the set rate. After the auction, the bonds can be sold in the secondary market.

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Treasury TIPS

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A special type of Treasury note or bond that offers protection from inflation. Like other Treasuries, an inflation-indexed security pays interest every six months and pays the principal when the security matures. The difference is that the coupon payments and underlying principal are automatically increased to compensate for inflation as measured by the consumer price index (CPI). Also referred to as "Treasury inflation-indexed securities".

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Treasury CMBs

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A type of mortgage-backed security that is secured by the loan on a commercial property. A CMBS can provide liquidity to real estate investors and to commercial lenders. As with other types of MBS, the increased use of CMBS can be attributable to the rapid rise in real estate prices over the years.

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Nonmarketable US Government Securities

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Savings Bonds
- Series EE Bonds
- Series HH Bonds
- Series I Bonds

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Series EE Bonds

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A non-marketable, interest-bearing U.S. government savings bond issued at a discount from par.

Interest on Series EE bonds is exempt from state and local taxes.

You can now purchase (paperless) Series EE bonds online from the U.S. Treasury.

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Series HH Bonds

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A non-marketable, interest-bearing U.S. government savings bond issued at par and acquired only by exchanging Series EE bonds.

You can exchange Series EE bonds for Series HH if you hold the EE bonds you've purchased before January 2003 for longer than six months or if you hold the EE bonds you've purchased after February 2003 for longer than one year. Interest on Series HH bonds is exempt from state and local taxes.

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Series I Bonds

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You can exchange Series EE bonds for Series HH if you hold the EE bonds you've purchased before January 2003 for longer than six months or if you hold the EE bonds you've purchased after February 2003 for longer than one year. Interest on Series HH bonds is exempt from state and local taxes.

Series I bonds are meant to give investors a return, plus protection on their purchasing power.

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Federal Farm Credit Banks

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In the United States, a network of federally chartered financial institutions designed to provide credit-related services to the agricultural and farming sectors of the economy. In total, this government-sponsored enterprise comprises approximately 100 financial institutions that serve all 50 states and Puerto Rico.

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Federal Home Loan Banks

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Created by the Federal Home Loan Bank Act of 1932 in response to the depressive economic conditions of the era which had impaired the U.S. banking system. Its primary purpose was to increase the amount of funds available for lending institutions who provide mortgages and similar loan agreements to individuals. Also referred to as the "FHL Bank System".

Having served its original objectives well, the FHLB system now primarily focuses on increasing the amount of loanable funds available for affordable housing and community development projects. It continues to have a material impact on housing and development financing, offering funds to member institutions at rates which are usually lower than commercially competitive prices.

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Student Loan Marketing Association (SLMA or Sallie Mae)

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A publicly traded company that is the largest provider of educational loans in the U.S. Along with providing student loans, Sallie Mae purchases student loans from the original lenders and provides financing to state student-loan agencies.

Sallie Mae was originally formed in 1972 as a government enterprise but as of 2004 is a completely independent publicly traded company. Sallie Mae is traded on the NYSE with the ticker symbol SLM.

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Mortgage Backed Securities

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A type of asset-backed security that is secured by a mortgage, or a collection of mortgages. These securities must also be grouped in one of the top two ratings as determined by a accredited credit rating agency, and usually pay periodic payments that are similar to coupon payments. Furthermore, the mortgage must have originated from a regulated and authorized financial institution.

Also known as a mortgage related security, or a mortgage pass-through.

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Pass Through Certificates

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Fixed-income securities that represent an undivided interest in a pool of federally insured mortgages put together by the Government National Mortgage Association (Ginnie Mae).

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Freddie Mac - Federal Home Loan Mortgage Corp - FHLMC

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A congressionally chartered institution that buys mortgages from lenders and resells them as securities on the secondary mortgage market.

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Fannie Mae - Federal National Mortgage Association - FNMA

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A publicly traded company working to assure that mortgage money is readily available for existing and potential homeowners in the United States.

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Ginnie Mae - Government National Mortgage Association - GNMA

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A wholly-owned U.S. government corporation within the U.S. Department of Housing and Urban Development (HUD). The main focus of Ginnie Mae is to ensure liquidity for U.S. government-insured mortgages including those insured by the Federal Housing Administration (FHA), the Veterans Administration (VA) and the Rural Housing Administration (RHA). The majority of mortgages securitized as Ginnie Mae mortgage-backed securities are those guaranteed by FHA, which are typically mortgages for first-time home buyers and low-income borrowers.

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Collateralized Mortgage Obligation - CMO

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A type of mortgage-backed security that creates separate pools of pass-through rates for different classes of bondholders with varying maturities, called tranches. The repayments from the pool of pass-through securities are used to retire the bonds in the order specified by the bonds' prospectus.

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Average Life

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An estimate of the number of terms to maturity, taking the possibility of early payments into account. Average life is calculated using the weighted average time to the receipt of all future cash flows.

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Sequential Pay CMO

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A type of collateralized mortgage obligation (CMO) in which there are several tranches. Each tranche's holder receives interest payments as long as the tranche's principal amount has not been completely paid off. The senior tranche receives all initial principal payments until it is completely paid off, after which the next most senior tranche receives all the principle payments, and so on.

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Planned Amortization Class (PAC) Tranche

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A class of tranche in a planned amortization class (PAC) bond that receives a primary payment schedule. As long as the actual prepayment rate is between a designated range of prepayment speeds, the life of the PAC tranche will remain relatively stable. This tranche of the PAC bond receives some measure of protection against prepayment risk.

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Targeted Amortization Class - TAC

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A type of credit derivative that is similar to a planned amortization class (PAC) in that it protects investors from prepayment; however, it is structured differently than a PAC. TACs protect investors from a rise in the prepayment rate or a fall in interest rates. They do not protect from a fall in the prepayment rate like PACs.
The TAC is essentially a bond under a collateralized mortgage obligation (CMO). Under a TAC, the principal is paid on a predetermined schedule. Any prepayment that occurs is amortized in order to maintain the schedule.

TACs are inferior to PACs because they only provide one-sided prepayment protection.

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Companion or Support Bonds

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A class of tranche found in a planned amortization class (PAC) bond that is responsible for protecting the PAC tranche from both contraction and extension risk. The companion bond is designed to absorb excess principal payments during times of high prepayment speeds and defer receiving principal payments during times of low prepayment speeds.

More specifically, in situations of high prepayment speeds, the companion bond takes as much of the excess repayments from the PAC tranche as possible and uses them to repay its own principal amount. Once its portion of the principal is completely paid off, all excess principle payments go back to the PAC bond.

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Z-Tranches

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A special type of bond class in a sequential pay collateralized mortgage obligation. This class of bond does not receive any interest or principal payments until all other tranches have been completely paid off. In a Z-tranche, the interest that is not paid is accrued and added to the principal for future interest calculation purposes.

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Interest Only (IO) Securities

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A security based solely on interest payments from a bond.

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Principal Only (PO) Securities

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A security based solely on principal payments from a bond.

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Super Floater

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if the interest rate is adjusted by more than the change in the index.

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Inverse Floater

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If the intere rate moves in the opposite direction to the designated Index

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Money Market Securities

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Commerical Paper
Bankers' Acceptance
Negotiable Certificates of Deposit
Federal Funds
Repurchase Agreements (Repos)

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Commerical Paper

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An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities. Maturities on commercial paper rarely range any longer than 270 days. The debt is usually issued at a discount, reflecting prevailing market interest rates.

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Bankers' Acceptance

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A short-term credit investment created by a non-financial firm and guaranteed by a bank


Acceptances are traded at a discount from face value on the secondary market. Banker's acceptances are very similar to T-bills and are often used in money market funds.

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Negotiable Certificates of Deposit

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A certificate of deposit with a minimum face value of $100,000. These are guaranteed by the bank and can usually be sold in a highly liquid secondary market, but they cannot be cashed-in before maturity.

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Federal Funds

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Money borrowed overning on a bank-to-bank basis

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Repurchase Agreement (Repos)

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A form of short-term borrowing for dealers in government securities. The dealer sells the government securities to investors, usually on an overnight basis, and buys them back the following day.

For the party selling the security (and agreeing to repurchase it in the future) it is a repo; for the party on the other end of the transaction, (buying the security and agreeing to sell in the future) it is a reverse repurchase agreement.