Question 3

Ginnie Maes are issued by a federal agency.

Ginnie Mae securities are indeed issued by a federal agency, specifically the Government National Mortgage Association. This distinction is crucial as it underscores the government backing of these securities.

A) Ginnie Maes pay interest semiannually.

This statement is incorrect because Ginnie Mae securities typically pay interest monthly, not semiannually. This monthly payment structure is an important feature that differentiates them from some other types of securities.

B) Ginnie Maes are issued by a federal agency.

This statement is correct as Ginnie Mae is a wholly-owned government corporation within the Department of Housing and Urban Development (HUD). This federal backing provides a level of security to investors that is not found in privately issued securities.

C) Ginnie Mae interest is exempt from state and local taxes.

This statement is misleading. While the interest from Ginnie Mae securities is exempt from state and local taxes, it is still subject to federal income tax. Therefore, it does not fully convey the tax implications of investing in these securities.

D) Ginnie Maes are guaranteed by the Federal National Mortgage Association (Fannie Mae).

This statement is incorrect. Ginnie Mae securities are not guaranteed by Fannie Mae; rather, they are backed by the full faith and credit of the U.S. government. This distinction is important for understanding the differences between Ginnie Mae and Fannie Mae securities.

Conclusion

The correct answer is B because it accurately reflects the nature of Ginnie Mae securities as being issued by a federal agency, which provides them with government backing. Options A, C, and D either misrepresent the characteristics of Ginnie Mae securities or confuse them with other entities, thus failing to accurately describe their nature and the benefits they provide to investors.