Debt Securities - Agency Bonds

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. Taxes

    Agency Bonds: Limited Risk And Higher Return

    Discover these safe alternatives to Treasury bonds.
  2. Credit & Loans

    What Is Sallie Mae And How Does It Work?

    Sallie Mae is the only game in town for some would-be college students seeking loans, so it's not surprising that it's got huge growth ambitions.
  3. Bonds & Fixed Income

    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. Home & Auto

    Remodeling The Housing Finance Industry

    The meltdown in mortgage-backed securities is bringing about reform in home financing.
  5. Insurance

    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?
  6. Credit & Loans

    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.
  7. Economics

    How Interest Rates Affect The Housing Market

    Understand how rate changes can affect home prices, and learn how you can keep up.
  8. Mutual Funds & ETFs

    VBMFX: Top 5 Holdings Analysis

    Find out which securities hold the top five positions in the world's largest bond fund, the Vanguard Total Bond Market Index Fund.
  9. Stock Analysis

    Bill Gross Bets Big On Mortgage Bonds

    Bond King, Bill Gross’ recent return to the MBS market could signal a revival in the bond type.
  10. Insurance

    Find Security In Covered Bonds

    Find out about a safe investing alternative that could have prevented the subprime meltdown.
RELATED TERMS
  1. Agency Bond

    A bond issued by a government agency. These bonds are not fully ...
  2. Ginnie Mae - Government National ...

    A U.S. government corporation within the U.S. Department of Housing ...
  3. Tandem Plan

    A mortgage purchase program subsidized by the U.S. government. ...
  4. Instrumentality

    An organization that serves a public purpose and is closely tied ...
  5. Ginnie Mae Pass Through

    A type of investment issued by the Government National Mortgage ...
  6. Federal Agencies

    Special government organizations set up for a specific purpose ...
RELATED FAQS
  1. Can Sallie Mae loans be forgiven?

    Understand the difference between private and public student loans. Learn if Sallie Mae loans can be forgiven and if other ... Read Answer >>
  2. Do Sallie Mae loans go directly to your school?

    Understand the types of financial aid and student loans that Sallie Mae offers college students. Learn when funds are disbursed ... Read Answer >>
  3. What forms of debt security are available for the average investor?

    Discover the various different types of debt securities, issued by government entities or corporations, that are available ... Read Answer >>
  4. How does Sallie Mae disburse funds?

    Understand what Sallie Mae is and how it operates. Learn about the different ways in which Sallie Mae disburses funds to ... Read Answer >>
  5. Who are the key players in the bond market?

    The bond market can essentially be broken down into three main groups: issuers, underwriters and purchasers. The issuers ... Read Answer >>
  6. Can I buy a house directly from Fannie Mae (FNMA)?

    Yes; you can buy homes directly from Fannie Mae. Fannie Mae (the Federal National Mortgage Association, or FNMA) is a government-sponsored ... Read Answer >>
Hot Definitions
  1. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  2. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  3. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  4. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  5. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
  6. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
Trading Center