Agency Bond

Agency Bond Definition

An agency bond is the bond issued by a government agency and tends to be relatively more liquid as compared to other bonds. However, they are typically less liquid than treasuries and do not have the same full federal guarantee. Agency bonds offer higher interest rates as compared to the treasury, while relative lack of liquidity may make them unsuitable for some investors.

Types of Agency Bonds

The following are the types of agency bonds.

Agency bond types

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#1 – Issued by Federal Government Agency

These include the Federal housing administration (FHPA), Small business administration (SBA), Government national mortgage association ( GNMA or Ginnie Mae). Bonds issued by federal government agencies are generally guaranteed by the federal government, similar to treasuries.

#2 – Issued by Government Sponsored Enterprise

Includes the Federal national mortgage association (Fannie Mae), Federal home loan Mortgage (Freddie Mac), Federal farm credit banks, Funding corporation, and Federal home loan bank. GSE are quasi-governmental organizations created to enhance the availability of credit and reduce the cost of funding to targeted sectors of the economy.

This will eventually result in reducing the overall risk of capital lossCapital LossCapital Loss is a loss when the value of the consideration received from the result of the transfer of capital assets is less than the aggregate value of the cost of acquisition & cost of the improvement. In simpler words, it can be stated as the loss derived from the transfer of capital assets.read more to investors. These entities are supervised but not directly managed by the federal government. These are privately owned and set up with a profit motive by providing liquidityLiquidityLiquidity shows the ease of converting the assets or the securities of the company into the cash. Liquidity is the ability of the firm to pay off the current liabilities with the current assets it possesses.read more to capital markets typesCapital Markets TypesA capital market is a place where buyers and sellers interact and trade financial securities such as debentures, stocks, debt instruments, bonds, and derivative instruments such as futures, options, swaps, and exchange-traded funds (ETFs). There are two kinds of markets: primary markets and secondary markets.read more. In this regard, they invest in capital stockCapital StockThe capital stock is the total amount of share capital (including equity capital and preference capital) that has been issued by a company. It is a way of raising funds by the company to meet its various business goals.read more and debt securities guarantee MBS, purchase loans and hold them in their portfolio, and collect fees for guarantee and other services.

Features of Agency Bonds

Structure of Agency Bonds

Advantages of Agency Bonds

Disadvantages

  • Minimum capital requirement: There is a limitation on minimum capital amount to be invested in agency bonds i.e., a minimum investment of $25,000 is required in Ginnie Mae Agency bonds, which means an investor with small investment portfolios cannot invest in these bonds.
  • Complex in nature- Some agency bond issues have features that make them more “structured” and complex in nature which further reduces the liquidity of these investments and makes them unsuitable for individual investors.
  • Fully Taxable-Agency bond issuers such as GSE entities Freddie Mac and Fannie Mae are fully taxable as per local or state regulation. Capital gains or losses when selling agency bonds are tax as per tax regulations.

Conclusion

Agency bonds are subject to interest rate, liquidity, reinvestmentReinvestmentReinvestment is the process of investing the returns received from investment in dividends, interests, or cash rewards to purchase additional shares and reinvesting the gains. Investors do not opt for cash benefits as they are reinvesting their profits in their portfolio.read more, credit, call, inflation, market, and other macro event risks similar to other fixed-income securities.

This has been a guide to what are Agency Bonds and its definition. Here we discuss the types of agency bonds along with its features and structure. You can learn more about finance from the following articles –

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