U.S. Government Securities and the Series 7 Exam - dummies

U.S. Government Securities and the Series 7 Exam

By Steven M. Rice

Issuers of debt securities include corporations, local governments (municipal bonds), and the U.S. government. For the Series 7 exam, you need to be able to recognize the different types of U.S. government securities and their tax benefits.

Practice questions

  1. One of your customers purchased ten 4.5% Treasury bonds at 100-12. What was the total dollar amount of the purchase?

    A. $1,001.20

    B. $1,003.75

    C. $10,012.00

    D. $10,037.50

    Answer: D. $10,037.50

    Government notes and bonds are quoted in 32nds. Therefore, a quote of 100-12 means 100-12/32, which translates to 100.375 (12/32 = 0.375). Next, you have to move the decimal point over one position to the right because bonds are quoted as a percentage of $1,000 par. So the price of each bond is $1,003.75, and because the investor purchased ten, the overall cost is ($1003.75)(10 bonds) = $10,037.50.

  2. Treasury bonds have initial maturities of

    A. 1 month to 1 year

    B. more than 1 year to 10 years

    C. between 10 and 30 years

    D. between 1 and 30 years

    Answer: C. between 10 and 30 years

    Treasury bonds (T-bonds) have the longest maturity and have an initial maturity of anywhere between 10 and 30 years.

  3. If an investor is purchasing a T-bond quoted $102.04 to $102.24, what would he be expected to pay for the bond, excluding commission?

    A. $1,021.25

    B, $1,022.40

    C. $1,024.00

    D. $1,027.50

    Answer: D. $1,027.50

    Remember, you always buy at the ask (offer) price and sell at the bid price. The ask price in this case is $102.24. Because this is a Treasury bond (T-bond), it’s quoted in 32nds. Therefore, 102.24 is actually 102-24/32. To get this into a decimal, divide the fraction 24 by 32:

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    This means that the bonds are selling for 102.75, or 102.75 percent of $1,000, which gives you a purchase price of (102.75%)($1,000 par) = $1,027.50.