FINRA Series 7 / 63 / 65 U.S. Treasuries and Agencies
Last updated: May 2, 2026
U.S. Treasuries and Agencies questions are one of the highest-leverage areas to study for the FINRA Series 7 / 63 / 65. This guide breaks down the rule, the elements you need to recognize, the named traps that catch most students, and a memory aid that scales to test day. Read it once, then practice the same sub-topic adaptively in the app.
The rule
U.S. Treasury securities (T-bills, T-notes, T-bonds, TIPS, STRIPS) are direct obligations of the U.S. government, considered free of credit risk, and their interest is exempt from state and local income tax but fully taxable at the federal level. Federal agency securities are issued either by true government agencies (GNMA, backed by the full faith and credit of the U.S.) or by government-sponsored enterprises (FNMA, FHLMC, FHLB, Federal Farm Credit), which carry an implied — not explicit — federal guarantee. Interest taxation varies: GNMA, FNMA, and FHLMC interest is fully taxable at all levels; FHLB and Federal Farm Credit interest is exempt from state and local tax. Suitability turns on credit quality, interest-rate risk, prepayment risk (for mortgage-backed agencies), and the customer's tax bracket and need for liquidity.
Elements breakdown
Treasury Bills (T-bills)
Short-term direct obligations of the U.S. Treasury issued at a discount from face value, maturing in one year or less.
- Maturities of 4, 13, 26, or 52 weeks
- Issued at discount, redeemed at par
- No stated coupon — interest is the discount
- Quoted on a discount-yield basis
- Minimum $100 face, sold in $100 increments
Treasury Notes (T-notes) and Bonds (T-bonds)
Coupon-bearing direct obligations of the U.S. Treasury. Notes mature in 2-10 years; bonds mature in 20 or 30 years.
- Semiannual interest payments
- Quoted in 32nds of a point (e.g., 99-16 = 99.50)
- Settle T+1 in the regular way
- Interest taxable federally, exempt state/local
- No call protection on most issues post-1985
TIPS (Treasury Inflation-Protected Securities)
Treasury notes/bonds whose principal adjusts with the CPI to protect against inflation.
- Principal adjusted semiannually for CPI changes
- Fixed coupon rate applied to adjusted principal
- Inflation adjustment is taxable in year accrued (phantom income)
- Maturities of 5, 10, or 30 years
- Best suited for tax-deferred accounts
STRIPS and Treasury Zeros
Separate Trading of Registered Interest and Principal Securities — Treasury bonds whose coupon and principal payments have been stripped and sold separately as zero-coupon instruments.
- Sold at deep discount, mature at par
- No periodic interest payments
- Accreted discount is taxed annually as phantom income
- High duration — extreme price volatility
- Useful for funding known future liabilities
GNMA (Ginnie Mae)
Government National Mortgage Association — pass-through mortgage-backed securities backed by the full faith and credit of the U.S. government.
- Direct U.S. government guarantee on principal and interest
- Monthly payments combining principal and interest
- Subject to prepayment risk and extension risk
- Interest fully taxable at federal, state, and local levels
- Minimum $25,000 initial purchase
FNMA, FHLMC, FHLB, Federal Farm Credit
Government-sponsored enterprises (GSEs) issuing debt and mortgage-backed securities; not directly guaranteed by the U.S. Treasury.
- Implied — not explicit — federal backing
- FNMA/FHLMC interest fully taxable at all levels
- FHLB and Federal Farm Credit interest exempt state/local
- Higher yields than Treasuries to compensate for credit risk
- Issued in book-entry form
Common patterns and traps
Implied-Equals-Explicit Trap
Wrong answers blur the distinction between full-faith-and-credit obligations (Treasuries, GNMA) and the implied backing of GSEs like FNMA, FHLMC, FHLB, and Federal Farm Credit. Candidates who memorize "agency = government" miss that only GNMA among the mortgage-backed agencies carries an explicit guarantee. The exam exploits this by labeling FNMA or FHLMC as "backed by the U.S. government" in a distractor.
A choice that says "FNMA pass-throughs are guaranteed by the full faith and credit of the United States" or that lumps GNMA, FNMA, and FHLMC together as carrying identical credit backing.
State-Tax Mix-Up
Candidates correctly remember that Treasury interest is exempt from state and local tax, then over-apply the rule to all federal agencies. GNMA, FNMA, and FHLMC interest is fully taxable at every level; only FHLB and Federal Farm Credit share the state/local exemption with Treasuries. Distractors flip this in either direction.
A choice claiming "interest on GNMA pass-throughs is exempt from state income tax" or, conversely, that "interest on FHLB notes is fully taxable at the state level."
Phantom-Income Blindspot
Zero-coupon Treasuries (STRIPS, T-bill held over a tax year that crosses, TIPS inflation accruals) generate taxable income each year even though the customer receives no cash. Candidates recommending these in taxable accounts ignore the cash-flow mismatch. The trap is recommending a STRIP or TIPS to a retiree in a taxable account who needs current income.
A recommendation choice such as "Purchase 30-year Treasury STRIPS in the customer's individual taxable account to fund a college expense in 18 years" without mention of the annual tax accrual.
Quote-Convention Confusion
Treasuries are quoted in 32nds (e.g., 98-16 means 98 16/32 = 98.50% of par), while corporates and municipals are quoted in decimals or basis points. T-bills are quoted on a discount-yield basis, not a price basis. Wrong answers misread a Treasury quote or apply corporate-bond conventions.
A choice that converts a 99-08 Treasury quote to $99.08 per $100 face rather than $99.25, or that treats a T-bill quote of 4.10/4.05 as a yield-to-maturity rather than a discount yield.
Prepayment-vs-Default Confusion
GNMA and other mortgage-backed agencies have essentially no default risk on the underlying cash flows because of the federal guarantee, but they have substantial prepayment and extension risk. Candidates conflate the two and conclude GNMAs are appropriate for any conservative investor needing predictable cash flows. The exam tests whether you recognize prepayment as the binding risk.
A suitability choice that says "GNMA pass-throughs offer predictable monthly principal and interest payments suitable for an investor needing a fixed income stream," ignoring prepayment uncertainty.
How it works
Start by sorting the security into one of two buckets: direct Treasury obligation, or agency. If it is a direct Treasury (bills, notes, bonds, TIPS, STRIPS), the credit risk is essentially zero and the interest is federally taxable but state- and local-tax-exempt — that exemption is the Series 7 hot button. Then ask whether the security pays a coupon (notes, bonds, TIPS), is sold at a discount (bills), or is a zero (STRIPS). For example, your customer Anika buys a $50,000 face STRIP yielding 4.2% maturing in 18 years; she pays roughly $24,000 today, receives no checks, but must report imputed interest each year — push her to hold it inside her IRA. For agencies, separate GNMA (full-faith-and-credit, fully taxable) from GSEs like FNMA and FHLMC (implied backing, fully taxable) and from FHLB / Federal Farm Credit (implied backing, state/local exempt). Mortgage-backed agencies carry prepayment risk: when rates fall, homeowners refinance and your customer gets principal back early at exactly the time reinvestment yields are worst.
Worked examples
Which recommendation is LEAST suitable for Tomás given his stated needs and tax situation?
- A The 10-year Treasury note, because the interest is exempt from Oregon state income tax
- B The GNMA pass-through, because it provides monthly principal and interest payments
- C The FHLB intermediate note, because the interest is exempt from Oregon state income tax
- D The 20-year Treasury STRIP, because zero-coupon Treasuries provide no current cash flow yet generate annual phantom income taxable in the account ✓ Correct
Why D is correct: A Treasury STRIP pays no current interest yet generates imputed interest each year that must be reported as taxable income. For a retiree who needs current monthly cash flow and holds the bond in a taxable account, this is the worst possible match — he pays tax on income he never receives. The other three securities all generate actual cash flow, and the FHLB note and Treasury note both carry the Oregon state-tax exemption that benefits Tomás directly.
Why each wrong choice fails:
- A: The Treasury note is suitable: it provides semiannual cash flow and Treasury interest is exempt from Oregon state income tax, which is valuable in his 9.9% state bracket.
- B: GNMA pass-throughs provide monthly principal and interest, directly matching Tomás's need for monthly income; while they carry prepayment risk, they are not the LEAST suitable choice given a STRIP is in the running. (Prepayment-vs-Default Confusion)
- C: FHLB notes are one of the few agency securities whose interest is exempt from state and local income tax, making them attractive for an Oregon resident; they also pay current coupons.
Which response is correct?
- A All four securities are backed by the full faith and credit of the U.S. government
- B The 30-year Treasury bond and the 30-year Treasury STRIP only
- C The 30-year Treasury bond, the 30-year Treasury STRIP, and the 30-year GNMA pass-through ✓ Correct
- D The 30-year Treasury bond and the 30-year GNMA pass-through only
Why C is correct: Treasury bonds and Treasury STRIPS are direct obligations of the U.S. government. GNMA is the only mortgage-backed agency security carrying the full faith and credit of the United States. FNMA, although a federally chartered government-sponsored enterprise, carries only an implied federal guarantee — not an explicit one — even after its conservatorship.
Why each wrong choice fails:
- A: FNMA pass-throughs do not carry the full faith and credit of the U.S. government; they are obligations of a GSE with implied backing only. (Implied-Equals-Explicit Trap)
- B: This omits GNMA, which is in fact directly guaranteed by the federal government — GNMA is unique among mortgage-backed agencies in that respect.
- D: This omits Treasury STRIPS, which are direct obligations of the U.S. Treasury (created by stripping the coupons and principal off Treasury bonds) and therefore fully government-guaranteed.
Which of the following correctly identifies the positions whose interest is exempt from California state income tax?
- A The Treasury note and the FHLB discount note only ✓ Correct
- B The Treasury note, the FHLB discount note, and the GNMA pass-through
- C The Treasury note only
- D The Treasury note, the GNMA pass-through, and the FHLMC pass-through
Why A is correct: Direct U.S. Treasury obligations are exempt from state and local income tax. Among federal agencies, only certain issuers — notably FHLB and Federal Farm Credit — share that state/local exemption. GNMA, FNMA, and FHLMC interest is fully taxable at the federal, state, and local levels.
Why each wrong choice fails:
- B: GNMA interest is fully taxable at the state level despite GNMA's full-faith-and-credit federal guarantee; the credit guarantee and the tax treatment are independent issues. (State-Tax Mix-Up)
- C: This is too restrictive — FHLB notes also carry the state and local tax exemption, which is one of the principal reasons high-state-bracket investors hold them.
- D: GNMA and FHLMC interest are both fully taxable at the state level; this answer flips the rule by treating the federal guarantee as if it conferred a tax exemption. (Implied-Equals-Explicit Trap)
Memory aid
"GNMA-Guaranteed, GSE-implied; Treasuries Skip State." GNMA = full faith and credit; FNMA/FHLMC = implied; all Treasury direct obligations are federally taxed but state/local exempt.
Key distinction
GNMA is the only mortgage-backed agency security with the full faith and credit of the U.S. government; FNMA and FHLMC carry only an implied guarantee. All three, however, are fully taxable at the federal, state, and local levels — the state-tax exemption belongs to Treasuries, FHLB, and Federal Farm Credit.
Summary
Treasuries are credit-risk-free with federal-only taxation; GNMA is government-guaranteed but fully taxable; GSEs carry implied backing with mixed state-tax treatment.
Practice u.s. treasuries and agencies adaptively
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Start your free 7-day trialFrequently asked questions
What is u.s. treasuries and agencies on the FINRA Series 7 / 63 / 65?
U.S. Treasury securities (T-bills, T-notes, T-bonds, TIPS, STRIPS) are direct obligations of the U.S. government, considered free of credit risk, and their interest is exempt from state and local income tax but fully taxable at the federal level. Federal agency securities are issued either by true government agencies (GNMA, backed by the full faith and credit of the U.S.) or by government-sponsored enterprises (FNMA, FHLMC, FHLB, Federal Farm Credit), which carry an implied — not explicit — federal guarantee. Interest taxation varies: GNMA, FNMA, and FHLMC interest is fully taxable at all levels; FHLB and Federal Farm Credit interest is exempt from state and local tax. Suitability turns on credit quality, interest-rate risk, prepayment risk (for mortgage-backed agencies), and the customer's tax bracket and need for liquidity.
How do I practice u.s. treasuries and agencies questions?
The fastest way to improve on u.s. treasuries and agencies is targeted, adaptive practice — working questions that focus on your specific weak spots within this sub-topic, getting immediate feedback, and revisiting items you missed on a spaced-repetition schedule. Neureto's adaptive engine does this automatically across the FINRA Series 7 / 63 / 65; start a free 7-day trial to see your sub-topic mastery climb in real time.
What's the most important distinction to remember for u.s. treasuries and agencies?
GNMA is the only mortgage-backed agency security with the full faith and credit of the U.S. government; FNMA and FHLMC carry only an implied guarantee. All three, however, are fully taxable at the federal, state, and local levels — the state-tax exemption belongs to Treasuries, FHLB, and Federal Farm Credit.
Is there a memory aid for u.s. treasuries and agencies questions?
"GNMA-Guaranteed, GSE-implied; Treasuries Skip State." GNMA = full faith and credit; FNMA/FHLMC = implied; all Treasury direct obligations are federally taxed but state/local exempt.
What's a common trap on u.s. treasuries and agencies questions?
Confusing GNMA's full-faith-and-credit guarantee with the implied backing of FNMA and FHLMC
What's a common trap on u.s. treasuries and agencies questions?
Forgetting that GNMA interest is fully taxable at the state level even though it is a federal agency
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