Investor's wiki

Agency Security

Agency Security

What Is an Agency Security?

An agency security is an okay debt obligation that is issued by a U.S. government-sponsored enterprise (GSE) or other federally related entity. Agency securities, at times called "agencies," are issued by GSEs which incorporate the Federal National Mortgage Association (FNMA), Federal Home Loan Bank, Federal Home Loan Mortgage Corporation (FHLMC), and the Student Loan Marketing Association (SLMA).

Grasping Agency Securities

Government-sponsored enterprises (GSEs) were made to reduce the costs associated with borrowing for certain sectors of the economy. For instance, the Federal National Mortgage Association (known as Fannie Mae) was acquainted with work on the flow of credit in the housing economy. The Federal Agricultural Mortgage Association (Farmer Mac), a farming GSE, guarantees the opportune repayment of principal and interest to agricultural bond investors. At the point when a GSE issues a loan as a bond, the security is alluded to as an agency security.

Special Considerations

The interest from the vast majority agency securities is exempt from nearby and state taxes. Farmer Mac, Freddie Mac, and Fannie Mae agency bonds are fully taxable. Agency bonds, when bought at a discount, may subject investors to capital gains taxes when they are sold or recovered.

Capital gains or losses while selling agency bonds are taxed at similar rates as stocks. Tennessee Valley Authority, Federal Home Loan Banks, and Federal Farm Credit Banks agency bonds are exempt from neighborhood and state taxes. What's more, agency securities are exempt from registration with the Securities and Exchange Commission (SEC) and are issued consistently.

Tax Status of GSEs and Government Agencies
 Legal NameCommon Name Tax Status
 Federal Agricultural Mortgage Corporation Farmer Mac Fully taxable
 Federal Farm Credit Banks Funding Corporation Farm Credit State and local exempt
 Federal Home Loan Banks FHL Banks State and local exempt
 Federal Home Loan Mortgage Corporation Freddie Mac Fully taxable
 Federal National Mortgage Association Fannie Mae Fully taxable
 Tennessee Valley Authority TVA State and local exempt
## Types of Agency Securities

Agency securities are issued either by a GSE or other federal government agency.

Federal Government Agency Bond

Federal government agency bonds are issued by the Federal Housing Administration (FHA), Small Business Administration (SBA), Tennessee Valley Authority (TVA), and Government National Mortgage Association (GNMA). GNMAs are usually issued as mortgage pass-through securities. Like Treasury securities, federal government agency securities are backed by the full faith and credit of the U.S. government, with the exception of securities of TVA.

An investor hopes to receive customary interest payments from holding this agency bond. At maturity, the full face value of the agency bond is dispatched to the bondholder. Since federal agency bonds are less liquid than Treasury bonds, they offer a marginally higher rate of interest than Treasury bonds. Moreover, federal government agency bonds might be callable, and that means that investors are presented to the risk that the issuer might reclaim the bonds prior to their scheduled maturity date.

GSE Bond

A Government-Sponsored Enterprise (GSE) bond is an agency bond issued by such agencies as Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage (Freddie Mac), Federal Farm Credit Banks Funding Corporation, and the Federal Home Loan Bank. GSE agency bonds are not backed by similar guarantee as federal government agencies and, subsequently, have credit risk and default risk. Thus, the yield on these bonds is regularly higher than the yield on Treasury bonds.

Most agency securities pay a semi-annual fixed coupon and are sold in different additions, however the base investment level is generally $10,000 for the principal increase, and $5,000 augments from there on. GNMA securities can come in $25,000 increases.

Some agency bonds have fixed coupon rates while others have floating rates affixed to the bonds. Floating rate agency bonds have their interested rates occasionally adjusted to the movement of a benchmark rate, like the London Interbank Offered Rate (LIBOR).

To meet short-term financing needs, a few agencies might issue no-coupon discount notes, or "discos", at a discount to par. Discos have maturities going from a day to a year and, whenever sold prior to maturity, may bring about a loss for the agency bond investor.


  • Agency securities is the term used to depict two unique types of bonds: those issued by a U.S. government-sponsored enterprise (GSEs) or other U.S. federal government agency.
  • Agency securities issued by government agencies other than GSEs are backed by the full faith and credit of the U.S. government, just like Treasury bonds.
  • GSEs were made to reduce the costs associated with borrowing for certain sectors of the economy, like mortgages.