4. A) Look through the text below to say what types of securities are described in it.

b) Reread the text more carefully and explain how the US government uses debt instruments.

Us Government Securities

The US government relies heavily on debt financing. since the 1960s, revenues have seldom covered expenses, and the differences have been financed primarily by issuing debt instruments. Moreover, new debt must be issued in order to get the necessary funds to pay off old debt that comes due.

About two-thirds of the public debt is marketable, meaning that it is represented by securities that can be sold at any time by the original purchaser through government security dealers.

Marketable issuers include Treasury bills, notes, and bonds.

US Treasury Bonds have maturities greater than ten years at the time of issuance, with denominations ranging from $1,000 upward. Treasury bond issues have call provisions under which the Treasury has the right to force the investor to sell the bonds back to the government at par value.

US Savings Bonds are nonmarketable securities, offered only to individuals and selected organizations. There is a limit to the amount that may be purchased by any person in a single year. Two types are available: pure discount bonds and bonds that pay interest semiannually but can be redeemed for par value at any time.

To support credit for home purchase, the government has authorized the issuance of participation certificates. The most important certificates of this type are those issued by the Government National Mortgage Association (GNMA or “Ginnie Mae”), they are known as CNMA Modified Pass-Through Securities. Unlike most bonds, GNMA pas-through securities pay investors on a monthly basis an amount of money that represents both a pro rata return of principal and interest on the underlying mortgages.

US Corporate bonds. Corporate bonds are similar to other kinds of fixed-income securities. An issue of bonds is generally covered by an indenture, in which the issuing corporation promises a specified trustee that it will comply with a number of stated provisions, like the timely payment of required coupons and principal on the issue. The major types are as follows:

Mortgage bonds are debt that is secured by the pledge of specific property. In the event of default, the bondholders are entitled to obtain the property in question.

Collateral trust bonds are debt-backed by other securities that are usually held by the trustee.

Debentures are general obligations of the issuing corporation representing unsecured debt. A bond indenture will often require the issuing corporation to make annual payments into a sinking fund.

Words you may need:

treasury bond – довгострокові казначейські зобов’язання

call provision – умови позики, що передбачає право емітента достроково викупити цінні папери

par value – паритет, номінал

participation certificate – сертифікат участі

Government National Mortgage Association (GNMA) – Урядова національні іпотечна асоціація

pass-through security – цінний папір, що випущений на базі пулу іпотек

pro rata – пропорційний, пропорційно

fixed-income security – цінний папір з фіксованим доходом

indenture – письмова угода про емісію облігацій

trustee – довірена особа, опікун

mortgage bond – облігація, що забезпечена заставною під нерухомість

pledge – застава

collateral trust bond – облігація, що забезпечена іншими цінними паперами, що зберігаються на умовах трасту

unsecured debt – незабезпечений борг

sinking fund – викупний фонд, фонд погашення заборгованості

 TESTS