Treasury Security

An analyst compares the yield on a corporate bond with the yield on a Treasury security of the same maturity. What is the difference between the two called?

1. A.The real rateWrong. That concept concerns inflation adjustment, which plays no part in comparing two bonds today.
2. B.The coupon differentialWrong. The comparison is between yields, which reflect price as well as coupon.
3. C.The term premiumWrong. That would be the extra yield for a longer maturity, and maturity is held equal here.
4. D.The yield spread, compensating for the extra risk of the corporate issuerCorrect. With maturity matched, the remaining gap is the price of taking issuer risk.

Why: Holding maturity constant strips out the effect of the term structure and leaves the compensation investors demand for taking on this issuer rather than the government. That compensation is the yield spread, and it widens when perceived credit risk or illiquidity rises. A term premium describes the extra yield for lending over a longer horizon, which is not what is being isolated here. If the analyst compared a two-year and a thirty-year Treasury instead, the difference would be a term comparison rather than a credit one.

Which Treasury security is specifically designed to protect investors against inflation?

1. A.Ginnie Mae pass-throughsGNMA securities are mortgage-backed, not inflation-indexed.
2. B.Treasury bills, which are sold at a discountT-bills are short-term but offer no inflation adjustment.
3. C.TIPS, whose principal adjusts with the Consumer Price IndexCorrect — TIPS keep pace with inflation through principal adjustments.
4. D.Treasury bonds, which have the longest maturityLong maturity does not by itself protect against inflation.

Why: TIPS adjust their principal up or down with the Consumer Price Index, so both the principal and the dollar coupon keep pace with inflation.

Which Treasury security has the shortest maturity?

1. A.They are all the sameThe three Treasury instruments are distinguished precisely by their maturities, as the trap note lays out. They also differ in how they pay, since bills are issued at a discount while notes and bonds carry coupons.
2. B.Treasury bondsTreasury bonds sit at the far end of the maturity range, running beyond ten years. They are the longest of the three, which is the opposite of what the question asks for.
3. C.Treasury notesThe word note suggests something short, and notes are indeed shorter than bonds, but they occupy the middle of the range at two to ten years. Bills mature in a year or less and take the shortest slot.
4. D.Treasury billsCorrect - one year or less.

Why: Treasury bills have maturities of one year or less, the shortest of the three.