Introduction

Welcome to U.S. Government and Agency Securities, the section covering the safest corner of the bond market and the structured products built on top of it.

Exam Weight: Part of 73% (~91 questions, Function 3)

What You'll Learn

In this unit, you'll cover:

• Treasury Securities: T-bills, T-notes, and T-bonds; their maturities, pricing, and tax treatment
• Treasury Inflation-Protected Securities (TIPS): How inflation-protected securities adjust principal with CPI changes and create phantom income
• Separate Trading of Registered Interest and Principal of Securities (STRIPS) and Treasury Receipts: Zero-coupon instruments stripped from Treasuries vs. proprietary trust products
• Agency Securities: The critical distinctions between Ginnie Mae (full faith and credit), Fannie Mae/Freddie Mac (Government-Sponsored Enterprises, or GSEs, with implied backing), and Sallie Mae (fully private)
• Pass-Through Mortgage-Backed Securities (MBS): How mortgage payments flow to investors and the unique prepayment risks they face
• Collateralized Mortgage Obligations (CMOs): How tranches (PAC, TAC, companion, Z) redistribute prepayment risk without eliminating it
• Collateralized Debt Obligations (CDOs): Structured products backed by diverse debt, compared to mortgage-only CMOs
• Accrued Interest: Day-count conventions for Treasuries (actual/actual) vs. agencies and CMOs (30/360)

Why This Matters

Government and agency securities are the foundation of the fixed-income market. The Series 7 exam frequently tests your ability to distinguish between security types, understand who guarantees what, and identify the unique risks of mortgage-backed products. Expect questions on TIPS phantom income, the Ginnie Mae vs. GSE guarantee distinction, and CMO tranche risk hierarchies.

Let's start with the foundation: U.S. Treasury securities.