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Agency Security

Moneyzine Editor
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Moneyzine Editor
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January 4th, 2024
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Agency Security

Definition

The term agency security refers to bonds issued or guaranteed by a federal agency or those issued by a government-sponsored enterprise. Agency securities are considered low risk investments.

Explanation

In order to reduce the cost to borrow money, government sponsored agencies (GSEs) were created to serve certain sectors of the economy. This includes agencies such as the Federal Home Loan Mortgage Corporation (Freddie Mac), the Federal National Mortgage Association (Fannie Mae), the Federal Agricultural Mortgage Corporation (Farmer Mac), and the Student Loan Marketing Association (Sallie Mae).

Agency securities can be issued by a federal agency, guaranteed by an agency, or issued by a GSE. While these securities are not always backed by the full faith and credit of the United States Government, they are considered low risk investments due to an implied guarantee. This implied federal backing results in very high credit ratings. This low risk of default also results in relatively low rates of interest paid to bondholders. These securities are oftentimes exempt from state and local income taxes.

Minimum investments are generally $10,000, and agency bonds typically pay a semiannual fixed coupon rate. Some notable exceptions to this rule include:

  • Step-Up Securities: callable with a coupon that steps-up over time according to a pre-established schedule.

  • Floaters / Variable Rate Securities: pay a coupon rate that adjusts periodically according to a benchmark such as T Bills.

Related Terms

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  • Commodity-Backed Bonds
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  • The financial accounting term revenue bond refers to a debt security that guarantees repayment, and is secured, by a specific income-generating entity. Revenue bonds are a subset of municipal bonds and are typically issued with a face value of $5,000, with maturities of 20 to 30 years.
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  • General Obligation Bonds
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  • Ability to Pay (Financial Capacity)
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  • Accrual Bond
    The term accrual bond refers to a security that does not make periodic interest payments to the bondholder. As interest accrues, it is added to the principal of the bond and paid to the investor when the security matures.
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