Series 7 Government and Agency Securities Practice Questions

Correct answer: A. $985.00

Treasury notes and bonds are quoted in 32nds of a point, not decimal cents. 98:16 means 98 and 16/32, and 16/32 = 0.50, so the quote equals 98.50% of par. On a $1,000 bond, that's $985.00.

• A. Treasury prices are quoted in 32nds of a point; 16/32 = 0.50, so 98:16 equals 98.5% of par, or $985.00.
• B. This treats the quote as decimal cents rather than 32nds, which misreads how Treasury prices are quoted.
• C. This miscalculates 16/32 as if it were 1.6%, producing an incorrect dollar price.
• D. This misplaces the fractional portion of the quote, giving a price far too close to par.

Correct answer: D. Semiannually, in fixed coupon payments

Treasury notes and bonds are coupon-bearing instruments that pay fixed interest semiannually over the life of the security, distinct from T-bills (no coupon, discount only) and TIPS (principal adjusts for inflation, interest still paid semiannually but on the adjusted principal).

• A. A lump-sum payment at maturity describes a zero-coupon instrument or T-bill, not a coupon-bearing Treasury note.
• B. Annual, inflation-adjusted payments describe how TIPS principal is adjusted (with coupon paid on the adjusted principal), not a standard fixed-coupon Treasury note.
• C. Monthly payments tied to short-term rates describe a floating-rate note, not a fixed 3% coupon Treasury note.
• D. Treasury notes pay a fixed coupon rate in equal semiannual installments over the life of the security, which is standard for this instrument.

Correct answer: C. Government National Mortgage Association (GNMA/Ginnie Mae) certificates

GNMA is a wholly owned government corporation within HUD, and its pass-through certificates are the only mortgage-backed securities directly backed by the full faith and credit of the US government. FNMA and FHLMC are government-sponsored enterprises (GSEs) — privately owned (historically) and, while systemically important, their obligations carry only an implicit, not direct, government guarantee. FFCB and similar federal agency issuers are also GSE-type entities without the direct guarantee.

• A. FNMA (Fannie Mae) is a government-sponsored enterprise, not backed by the full faith and credit of the U.S. government.
• B. FHLMC (Freddie Mac) is also a GSE without the direct full faith and credit guarantee.
• C. Correct. GNMA (Ginnie Mae) is a government agency, not merely a GSE, and its securities carry the direct full faith and credit backing of the U.S. government.
• D. FFCB is a GSE whose securities are not backed by the direct full faith and credit of the U.S. government.

Correct answer: A. $9,898.89

Discount amount = Face x Rate x (Days/360) = $10,000 x 0.04 x (91/360) = $10,000 x 0.04 x 0.25278 = $101.11. Purchase price = Face - Discount = $10,000 - $101.11 = $9,898.89.

• A. Discount = $10,000 × 0.04 × (91/360) ≈ $101.11, so the purchase price is $10,000 − $101.11 ≈ $9,898.89.
• B. $9,600.00 overstates the discount as if it applied the 4% rate without properly adjusting for the 91-day holding period over a 360-day year.
• C. $9,900.27 is close but reflects a slightly miscalculated day-count adjustment rather than the correct 91/360 fraction.
• D. $10,101.11 incorrectly adds the discount amount to face value instead of subtracting it from face value.