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Government Bonds

Government Bonds

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Published by ravishankar1972
explains about Government/Agency Bonds
explains about Government/Agency Bonds

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Published by: ravishankar1972 on Aug 17, 2012
Copyright:Attribution Non-commercial


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About Government/Agency Bonds
One of the world’s largest and most liquid bond markets is comprised of debt securities issued bythe U.S. Treasury, by U.S. government agencies and by U.S government-sponsored enterprises.U.S. Treasury securities, used to finance the federal government debt, are also considered to havethe bond market’s lowest risk because they are guaranteed by the U.S. government’s “full faith andcredit” or, in other words, its taxing authority. Government agencies and government-sponsoredenterprises such as Ginnie Mae, Fannie Mae and Freddie Mac also issue debt to support their rolein financing mortgages.Use this section to learn more about:
The different types of U.S. government and agency securities
The advantages and risks of investing in Treasuries and government securitiesGo to theGovernment/Federal Agency Market At A Glance page to get news affecting thegovernment and federal agency bond markets as well as recent price and yield information on:
Treasury bills with maturities of less than one year 
Treasury notes with maturities between one and ten years, and
Treasury bonds with maturities of 10 years or more
Federal agency bondsStay informed on government bond market news and opportunities by visiting this page often for new content and market information.
Agency Bonds
Agency bonds are issued by two types of entities—1) Government Sponsored Enterprises (GSEs),usually federally-chartered but privately-owned corporations; and 2) Federal Government agencieswhich may issue or guarantee these bonds—to finance activities related to public purposes, such asincreasing home ownership or providing agricultural assistance. Agency bonds are issued in avariety of structures, coupon rates and maturities.Each GSE and Federal agency issues its own bonds, with sizes and terms appropriate to the needsand purposes of the financing. There are usually minimums to invest in agency bonds—$10,000for the first investment and increments of $5,000 for additional investments. Investing in GinnieMae Federal Agency bonds requires a $25,000 minimum investment. The degree to which anagency bond issuer is considered independent from the federal government impacts the level of itsdefault risk. The interest from most but not all agency bond issues is exempt from state and localtaxes; some of the biggest issuers such as GSE entities Freddie Mac and Fannie Mae are fullytaxable.
In general the agency bond market is considered a liquid market, in which investments can quicklyand easily be bought and sold. However, as explained below, some agency bond issues havefeatures that make the bond issues more "structured" and complex, which can reduce liquidity of these investments for investors and make them unsuitable for individual investors.
Agency Bonds issued by
Bonds issued by GSEs such as the Federal Home LoanMortgage Association (Freddie Mac), the Federal Home Loan Mortgage Association (Fannie Mae)and the Federal Home Loan Banks provide credit for the housing sector. Federal AgriculturalMortgage Corporation (Farmer Mac); the Farm Credit Banks and the Farm Credit SystemFinancial Assistance Corporation do the same for the farming sector. The bulk of all agency bonddebt—GSEs and Federal Government agencies—is issued by the Federal Home Loan Banks,Freddie Mac, Fannie Mae and the Federal Farm Credit banks. GSEs are not backed by the full faithand credit of the U.S. government, unlike U.S. Treasury bonds. These bonds have credit risk anddefault risk and the yield on these bonds is typically slightly higher than on U.S. Treasury bonds.Some GSEs such as Fannie Mae and Freddie Mac are publicly traded companies that register their stock with the SEC and provide publicly available documents such as annual reports on theSECwebsite.
Agency Bonds issued by Federal Government agencies
 —Bonds issued or guaranteed by FederalGovernment agencies such as the Small Business Administration, the Federal HousingAdministration and the Government National Mortgage Association (Ginnie Mae) are backed bythe full faith and credit of the U.S. government, just like U.S. Treasury bonds.* Full faith andcredit means that the U.S. government is committed to pay interest and principal back to theinvestor at maturity. Because different bonds have different structures, bonds issued by federalgovernment agencies may have call risk. In addition, agency bonds issued by Federal Governmentagencies are less liquid than Treasury bonds and therefore this type of agency bond may provide aslightly higher rate of interest than Treasury bonds.*A significant exception to this full faith and credit guarantee for Federal Government agency bonds are those issued by the Tennessee Valley Authority (TVA). Its bonds are secured by the power revenue generated by the Authority.
Types of Structures of Agency Bonds
As noted above, most agency bonds pay a fixed rate of interest or fixed coupon rate semi-annually. Most agency bonds are non-callable or bullet bonds. Like all bonds, agency bonds aresensitive to changes in interest rates—when interest rates increase, agency bond prices fall andvice versa.However, in addition to fixed rate coupon and non callable agency bonds, agencies do structuretheir bond issues to meet different investor needs.Variable or floating coupon rate agency bonds: so-called "floating rate" or "floaters" are agency bonds that have interest rates that adjust periodically. Adjustments are usually linked to an indexsuch as U.S. Treasury bond yields or LIBOR according to a predetermined formula (with limits onhow much the interest or coupon rate can change).
 No-coupon agency bond notes or "discos": no-coupon discount notes are issued by agencies tomeet short-term financing needs and are issued at a discount to par value. Investors who sell suchdiscos prior to maturity may lose money.Callable agency bonds with "step up" coupon rates: callable agency bonds that have a pre setcoupon rate "step up" that provides for increases in interest rates or coupon rate as the bondsapproach maturity to minimize the interest rate risk for investors over time. Step ups are oftencalled by issuers at a time of declining interest rates. Declining interest rates may accelerate theredemption of a callable bond, causing the investor's principal to be returned sooner thanexpected. As a consequence, an investor might have to reinvest principal at a lower rate of interest.The interest from most but not all agency bond issues is exempt from state and local taxes and it isimportant for investors to understand the tax consequences of agency bonds; some of the biggestagency bond issuers such as GSE entities Freddie Mac and Fannie Mae are fully taxable for example. Capital gains or losses when selling agency bonds are taxed at the same rates as stocks.Consult your financial advisor before determining whether agency bonds are a suitable investmentfor you.
Buying and Selling Agency Bonds
Agency securities are generally bought and sold through brokers and are likely to include fees or transaction costs.The agency bond market in which individuals might participate is considered relatively liquid.However, not all kinds of agency bond issues are considered liquid, including some of which may be structured for a particular issuer or class of investors and may not be suitable for individualinvestors. Investment dollar minimums may make buying and selling individual bonds less suitableto many individual investors than buying an agency bond fund or U.S. Treasuriesdirectly. Investors should take into account that the tax status of various agency bond issues variesdepending on the agency issuer. As with any investment, it is important to understand the work of the agency or enterprise that is issuing the bonds and know the credit rating of the issue. Thisallows an investor to know the basis on which a bond is being issued.Go to theGovernment/Federal Agency Market-at-a-Glance pageto see Agency bond priceinformation. You can find helpful information in The GSE Debt Market: An Overview. For additional investor resources on bond issuance programs see the following:
For more information and documentation for investors on Federal Farm Credit BanksFunding Corporation bond issuance programs, click here.
For more information and documentation for investors on Federal Home Loan BanksOffice of Finance (FHLB) bond issuance programs,click here.
For more information and documentation for investors on Federal Home Loan MortgageCorporation (FHLNC, also known as Freddie Mac) bond issuance programs,click here.
For more information and documentation for investors on Federal National MortgageAssociation (FNMA, also known as Fannie Mae) bond issuance programs,click here. 

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