DEFINITION of 'Federal Agencies'

Federal agencies are special government organizations set up for a specific purpose such as the management of resources, financial oversight of industries, or national security issues. These organizations are typically created by legislative action, but may initially be set up by a presidential order as well. The directors of these agencies are typically selected by Presidential appointment.

BREAKING DOWN 'Federal Agencies'

Federal agencies are created by a government to regulate industries or practices that require close oversight or specialized expertise. Some organizations, such as the Federal Deposit Insurance Corporation (FDIC) and the Government National Mortgage Association (GNMA) have their operations explicitly backed by the U.S. Treasury. Other organizations, such as Fannie Mae, Freddie Mac, and Sallie Mae are only provided with an implicit guarantee from the U.S. Treasury.

A number of these organizations which are an actual part of the government issue securities such as stocks and bonds that have been historically popular with investors. Examples of federal agency securities are the federal agency bonds which are bonds that are backed by the full faith and credit of the United States government. An investor expects to receive regular interest payments from holding this agency bond. At maturity, the full face value of the agency bond is repaid to the bondholder. Because federal agency bonds are less liquid than Treasury bonds, they offer slightly higher rate of interest than Treasury bonds. Federal agency bonds are issued by government agencies such as the Federal Housing Administration (FHA), Small Business Administration (SBA), and Government National Mortgage Association (GNMA or Ginnie Mae).

Another type of bond issued by government agencies is the government-sponsored enterprise (GSE) bond. Thee bonds are issued by corporations which are not quite part of the government but are set up by Congress to work for the common good of the country. These enterprises mostly operate on their own and are publicly held with stocks on the major exchanges. GSEs include Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage (Freddie Mac), Federal Farm Credit Banks Funding Corporation, and the Federal Home Loan Bank (FHLB). GSE bonds are not backed by the same guarantee as federal government agencies and, hence, have credit risk and default risk. For this reason, the yield on these bonds is typically higher than the yield on Treasury bonds.

Federal agency securities issued by Ginnie Mae, Fannie Mae, Freddie Mac or the Federal Home Loan Banks are backed by mortgage loans, and hold a very high credit rating. Agency securities are also used as collateral for the supply of money released by the Federal Reserve. Sold by a nationwide group of banks and dealers, these securities raise money to fund public needs such as road building, low-cost housing, urban renewal, and also to provide low interest rate loans to farmers, small business owners, and veterans.

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