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


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