U.S. Government Securities

What this video covers

• Why Treasury securities carry zero default risk and set the risk-free rate benchmark, and how full faith and credit backing differs from the implied moral obligation of Fannie Mae and Freddie Mac
• How T-bills, T-notes, and T-bonds differ in maturity, coupon structure, and pricing; specifically why T-bills are zero coupon securities sold at discount while notes and bonds pay semiannual fixed coupons
• Treasury pricing in 32nds: how to interpret a quote like 98:16 as 98 and 16/32 percent of par, and why this finer increment is used instead of corporate bond eighths
• How Treasury Inflation-Protected Securities (TIPS) work: fixed coupon rate with principal adjusted semiannually based on the Consumer Price Index (CPI), including the deflation floor at maturity
• Why both TIPS and STRIPS create phantom income: annual taxation of principal adjustments or discount accretion before cash is actually received, and the tax-deferred account recommendation
• How STRIPS are created by stripping coupon and principal payments from T-notes and T-bonds into separate zero-coupon securities, and why their long duration means highest interest rate risk among Treasuries
• The Ginnie Mae (GNMA) distinction as the only agency security with direct full faith and credit U.S. government backing, versus Fannie Mae and Freddie Mac with only implied backing and slightly higher yields
• How mortgage-backed securities (MBS) pass-throughs work as monthly payments of both interest and principal, and the opposing relationship between prepayment risk (falling rates) and extension risk (rising rates)
• The critical tax difference: Treasury securities are exempt from state and local taxes while agency securities are fully taxable at federal, state, and local levels