CFA Practice Question

CFA Practice Question

Which of the following is correct?
A. Bonds that are tax-advantaged will offer higher yields to investors.
B. Bonds issued by US Government Sponsored Entities such as Fannie Mae and Freddie Mac are not backed by full faith and credit of the US government.
C. Municipal bonds in the US may be tax-advantaged.
Explanation: Bonds issued by U.S. Government Sponsored Entities such as Fannie Mae and Freddie Mac are backed by full faith and credit of the U.S. government. Bonds that are tax-advantaged will offer lower yields to investors. When calculating the yields, the tax-advantage is not taken into account. Measures that do take into account the tax-advantage are measures like TEY (Taxable Equivalent Yield).

User Contributed Comments 5

User Comment
grew0001 wow, i'm in awe. Analystnotes is seemingly making shit up. B is correct and thus the right answer, while C can be construed as incorrect (Municipal bonds ARE tax-advantaged, not may).

To quote AN's own material directly: "With the exception of the securities issused by [Farmer Mac], GSE securities are not backed by the full faith and the credit of the US government and thus investors are exposed to (but very little) credit risk.

Bonds issuesd by Federally related institutions (FRI's) however are backed by the US. Remember, G and T (Ginnie Mae and Tennessee Valley Authorities) are guaranteed while the FFFFS (Freddie, Frannie, Sallie, etc) are not.
jsykora Fannie/Freddie have implied backing, not explicit backing, which is why they trade wide to Ginnie's. B is not the correct answer.
danelsley As per invesopedia,

GSEs carry the implicit backing of the U.S. Government, but they are not direct obligations of the U.S. Government.
leftcoast @grew0001 - not all municipal bonds are tax advantaged. Most are, but not all.

I think B is confusing, but C is definitely correct.
jjhigdon Concur with posts 2-4. Munis are not always tax advantaged and bonds issued by Fannie and Freddie are for all intents and purposes backed by the US Govt, but the backing is never the less an implied, not explicit or statutory.
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