Question

17. Which is true about Treasury notes and bonds? (May be more than one) a. They pay annual coupon payments b. They are now issued in both bearer and book entry format c. Their secondary market is very active d. The interest earned on them is exempt from State and Local Income taxes e. The interest earned on them is exempt from Federal, State and Local Income taxes f. Treasury notes pay annual interest while Treasury bonds pay semiannual interest g. Treasury bonds sold in the primary market have their coupon interest rates set by the Treasury h. Treasury bonds sold in the primary market have their yield to maturity set by the Treasury i. Treasury bonds sold in the primary market have their yield to maturity set by the non- competitive bidding process There is no active secondary market for T-notes and T-bonds

Answer 1

Please find the answer below:

BACKGROUND: Treasure Bills, also called T-Bills, are short-term fixed-income Government-issued bonds with maturity of one year or less from their issue date. On the contrary, Treasury Notes (T-Notes) have maturities of 1, 3, 5, 7 and 10 years, whereas Treasury Bonds (T-Bonds) offer higher maturities of 20 and 30 years.

a. Incorrect (Reason: Coupon payment is done semi-annually, i.e., every 6 months.)

b. Correct (Reason: Book entry or electronic paperless recording is admissible along with bearer form i.e. physical possession)

c. Correct (Reason: The secondary or auction market is active since Government-issued fixed income securities that are deemed safe and secure.)

d. Correct (Reason: The interest income earned by investors on T-Bonds and T-Notes are exempt from local and State taxes.)

e. Incorrect (Reason: The interest income earned by investors on T-Bonds and T-Notes are exempt from local and State taxes but is taxed at the federal level.)

f. Incorrect (Reason: Both T-Bonds and T-notes pay interest bi-annually.)

g. Correct (Reason: The coupon interest rate are largely influenced by the interest rates set by the Government based on the prevailing market rates. It is generally a fixed payment.)

h. Incorrect (Reason: The Yield to Maturity rates are determined by the demand and supply. It is the interest rate an investor would earn by reinvesting every coupon payment at a constant interest rate until the bond's maturity date, the present value of the future cashflows equals the bond's market price)

i. Incorrect (Both competitive and non-competitve bidding strategies formulated by the Government are used to determine the YTM in the primary market.)

j. Incorrect (There is an active secondary market for T-Bonds and T-Notes. Since they are Government-issued bonds, they are considered safe and secure and hence making the investment highly liquid. Please note that Bond Prices go down when auction rate increases and vice-versa.)

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