13. relates to the lower rates on Treasury securities that are in high demand. 1

Question

13. relates to the lower rates on Treasury securities that are in high demand. 14. The drawback to investing in a Treasury Strip is that is taxed each year even though is not paid. Thus these instruments are cash flow instruments until the maturity date. 15. Treasury has structured TIPS so that they are redeemed at the of the inflation adjusted principal and the initial par value. 16. The greater certainty of the cash flow for the PAC bonds comes at the expense of the non-PAC classes, called The is the mechanism employed to deal with the maturity mismatch between credit card receivables and the ABS securities that are issued.

Explanation / Answer

14. The drawback to investing in a Treasury Strip is that ACCRUED INTEREST is taxed each year even though is not paid. Thus these instruments are NEGATIVE cash flow instruments until the maturity date.

15. Treasury has structured TIPS so that they are redeemed at the GREATER of the inflation adjusted principal and the initial par value.

16. The greater certainty of the cash flow for the PAC bonds comes at the expense of the non-PAC classes, called SUPPORT OR COMPANION BONDS.

17. The SECURITIZATION (derivative instruments like interest rate swaps) is the mechanism employed to deal with the maturity mismatch between credit card receivables and the ABS securities that are issued.

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