SIE cheat sheetSection 2: Understanding Products & Risks (44%)
Government & Agency Bonds
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Treasury Securities (backed by full faith & credit of US govt)
- T-Bills: Maturity < 1 year (4, 8, 13, 17, 26, 52 weeks)
- Sold at a DISCOUNT, mature at par (no coupon payments)
- Safest investment, no credit risk
- Interest = par - purchase price
- T-Notes: Maturity 2-10 years
- Pay semiannual interest (coupon)
- Issued at or near par
- T-Bonds: Maturity 20-30 years
- Pay semiannual interest (coupon)
- Highest interest rate risk (longest duration)
- TIPS (Treasury Inflation-Protected Securities)
- Principal adjusts with CPI (inflation)
- Coupon rate stays fixed, but payment changes because principal changes
- Protects against INFLATION risk
- Interest is federally taxable (including phantom income on principal adjustments)
- I-Bonds (Savings Bonds)
- Combined fixed rate + inflation rate
- Purchase limit: $10,000/year electronically
- Cannot be sold in secondary market
Agency Securities
- GNMA (Ginnie Mae): Backed by full faith & credit of US govt (ONLY agency with this)
- FNMA (Fannie Mae): Government-sponsored enterprise (GSE), NOT directly backed
- FHLMC (Freddie Mac): GSE, NOT directly backed
- All issue mortgage-backed securities (MBS)
- Subject to prepayment risk (homeowners refinance when rates drop)
Key facts to memorize
- T-Bills: < 1 year, discount, no coupon
- T-Notes: 2-10 years, semiannual coupon
- T-Bonds: 20-30 years, semiannual coupon, highest interest rate risk
- TIPS: principal adjusts with CPI, protects against inflation
- GNMA = only agency with full government backing
- All Treasury securities: exempt from state/local tax
Mnemonics that stick
- "T-Bill = less Than 1 year, at a Discount (no coupon)"
- "T-Notes = kNow the middle (2-10 years)"
- "T-Bonds = Big and long (20-30 years)"
- "TIPS = Treasury Inflation-Protected Securities — principal adjusts with CPI"
- "GNMA = Government National — only one with FULL government backing"
- "Ginnie is the Government's Girl" — full faith & credit
Exam traps
- T-Bills are sold at DISCOUNT — they do NOT pay semiannual interest
- TIPS adjust the PRINCIPAL, not the coupon rate — rate stays fixed, payment amount changes
- TIPS phantom income (unrealized principal increase) is federally TAXABLE each year
- Only GNMA has full faith & credit backing — Fannie Mae and Freddie Mac do NOT
- Agency bonds have PREPAYMENT risk — when rates drop, mortgages get refinanced early
- Treasury securities are exempt from STATE/LOCAL tax (but not federal)
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