Not all federal government bonds are issued by the U.S. Treasury. Many federal agencies raise money for such specialized purposes as easing Americans' access to home mortgage funds, farm mortgage funds or student loans. These are called agency bonds, and like Treasury instruments, they are exceedingly unlikely to default. Should they ever default, the government is considered morally obligated to use its creditworthiness to guarantee investors against loss of interest or principal.

However, the federal government does not provide a legal guarantee on most agency securities. Because the federal government's guarantee is a moral rather than a legal obligation, the yields of agency bonds tend to be higher than those of Treasury securities.

Mortgage-backed Securities
Most agency bonds are mortgage-backed securities, which are investments in pools of mortgages. Their maturities range from one to 50 years and denominations vary from $1,000 to $50,000. Here are three agencies that issue mortgage-backed securities:


OTHER AGENCIES

Federal Farm Credit Bank (FFCB)
The FFCB is a self-described "system" - though others would call it a "network" - of lending institutions that provides credit to farmers, ranchers, fisheries, rural homeowners, rural utilities and related individuals, businesses and cooperatives. FFCB offers the following:

  • Discount notes: Short-term book-entry notes maturing in 365 days or less, denominated in $1,000 increments starting at a $5,000 minimum and issued at a discount.

  • Master notes: One-year interest-bearing bearer notes with a minimum face value of $25 million.

  • Bonds: Three-month to 30-year, interest-bearing book-entry bonds, denominated in $1,000 increments starting at a $5,000 minimum.

  • Designated bonds: Two- to five-year, interest-bearing, callable book-entry bonds denominated in $1,000 increments starting at a $5,000 minimum.


Student Loan Marketing Association (SLMA)
From the perspective of the debt markets, the SLMA (or, more commonly known as Sallie Mae) is quickly moving from being a government agency to being a corporate issuer.

  • Sallie Mae was chartered in 1972 to buy student loans from banks, essentially guaranteeing the debt of college students and recent graduates.
  • At the time, it was considered an inherently risky business that required government intervention in order to achieve the public benefit of a better-educated work force.
  • It turned out to be a good bet and quickly turned a profit.
  • During the Clinton administration, the Department of Education began making college loans directly, and Sallie Mae was left to diversify its financial offerings.

Exam Tips and Tricks

The SLMA board of directors announced that it will lose all vestiges of its government charter in 2006, so it will probably not be on the Series 7 exam.


Treasury STRIPS

Related Articles
  1. Personal Finance

    Are mortgage-backed securities backed by any guarantees?

    Actually, any mortgage-backed security (MBS) guarantee depends on who issued it.To review, an MBS is a security, created through the process of securitization, in which the underlying assets ...
  2. Personal Finance

    What You Need to Know About Fannie Mae Loans

    Fannie Mae (officially the Federal National Mortgage Association, or FNMA) is a government-sponsored enterprise (GSE) – that is, a publicly traded company which operates under Congressional charter ...
  3. Investing

    Find The Right Bond At The Right Time

    Find out which bonds you should be investing in and when you should be buying them.
  4. Personal Finance

    5 Tips to Lower Your Sallie Mae Payments

    Learn the essential tips on how to work with the Sallie Mae Corporation to lower the monthly payments on your private student loan.
  5. Insights

    How Interest Rates Affect the Housing Market

    Understand how rate changes can affect home prices and learn how you can keep up.
  6. Investing

    Should You Invest In Fannie Mae Stock?

    If you're risk-adverse, you might want to avoid investing in Fannie Mae. But if you're up for it, high risk could translate to high reward.
  7. Investing

    Fannie Mae and Freddie Mac, Boon Or Boom?

    These two companies are crucial to the mortgage market, but are they ticking timebombs?
  8. Insights

    Fannie Mae, Freddie Mac And The Credit Crisis Of 2008

    Is the U.S. Congress' failure to rein in these mortgage giants to blame for the financial fallout?
  9. Investing

    VBMFX: Overview of World's Largest Bond Mutual Fund

    VBMFX: Find out top positions in the world's largest bond fund, the Vanguard Total Bond Market Index Fund.
  10. Personal Finance

    How Sallie Mae Affects Student Loans

    Sallie Mae, which has financed many a college education, originally was a federally chartered government sponsored enterprise. Now, it does private loans.
Frequently Asked Questions
  1. What is the Financial Services Sector?

    A diverse group of companies, beyond banks and credit unions, comprises the financial services sector.
  2. Who are Whole Foods' (WFM) main competitors?

    Whole Foods' main competitors are Sprouts Farmers Markets and Trader Joe's. However, the recent acquisition by Amazon my ...
  3. What caused the Stock Market Crash of 1929 that preceded the Great Depression?

    Find out what led to the stock market crash of 1929, which in turn led to the Great Depression. It sparked a nearly 90% loss ...
  4. How does inflation affect the exchange rate between two nations?

    Inflation is closely related to interest rates, which can influence exchange rates. Countries attempt to balance interest ...
Trading Center