Federally Guaranteed Obligations

What is a Federally Guaranteed Obligations

Federally guaranteed obligations are debt securities issued by the United States government and considered risk-free on the grounds that they receive the full faith and credit of the federal government. The selling of these securities assists with funding the federal debt.

Federally guaranteed obligations take several forms, but the best-known are U.S. Treasury bonds, Treasury notes, and Treasury bills (T-bills).

BREAKING DOWN Federally Guaranteed Obligations

Federally guaranteed obligations offered by the U.S. Treasury at quarterly auctions. Before the mid 1970s, Treasury securities were sold in bulk by subscription and exchange offerings. Demand for these securities fluctuates, driving prices up or down at auction contingent upon their attractiveness relative to other debt securities.

Each federally guaranteed obligation offers a stated interest rate, known as the coupon rate, which isn't to be mistaken for its yield. Yield is the total return on the investment over its lifetime. Yield tends to increase in the event that the security sells at a discount to its interest rate. A coupon is the annual interest rate paid on a bond, communicated as a percentage of the face value. Other names incorporate coupon rate, coupon percent rate, and nominal yield.

These Treasury securities are intensely traded and profoundly liquid. Pricing on these debt instruments will differ by product and normally has a basis on the par value. Par value is the face value of a bond and decides the maturity value and coupon payment amounts.

Treasury Direct is the online platform which investors might use to purchase federal government securities directly from the U.S. Treasury. All federally guaranteed obligations have the backing and full faith and credit of the U.S. government.

Types of Federally Guaranteed Obligations

Government debt obligations come in different forms, with contrasting maturities, interest rates, coupons, and yields.

• Treasury bonds (T-bonds) is a marketable, fixed-interest U.S. government debt security with a maturity of over ten years. Treasury bonds make interest payments semi-annually, and the income received is just taxed at the federal level. Treasury bonds are referred to in the market as basically risk-free due to the lack of default risk of the U.S. government.
• Treasury notes arrive at maturity in one to ten years and have a fixed interest rate. They are accessible through either a competitive or non-competitive bid. With a competitive bid, investors indicate the yield they want, at the risk that their proposal may not be approved. While utilizing non-competitive bid investors accept yield in view of the auction results.
• Treasury bills (T-bills) are short-term debt obligation and arrive at maturity in under one year. They sell in denominations of $1,000 up to $5 million. T-bills have different maturities and sell at a discount from par value. The U.S. government effectively writes investors an IOU as the bill just pays on maturity.
• Treasury inflation-protected securities (TIPS) have an index basis to inflation which protects investors from the effects of inflation. TIPS are a generally safe investment since their par value changes with inflation, while the interest rate stays fixed.
• Floating rate notes (FRNs), otherwise called floaters, is a variable interest rate note. Interest rates have a benchmark, for example, the Treasury bill rate, Fed Funds rate or the prime rate. Government agencies and financial institutions issue the notes which have between a two-and five-year maturity.
• U.S. savings bonds have a fixed rate of interest over a fixed period. Many individuals find these bonds attractive on the grounds that they are not subject to state or nearby income taxes. These bonds can only with significant effort be transferred and are non-negotiable and carry a15-year to 30-year maturities.

Non-Treasury federal agency securities

Other federally guaranteed obligations are not issued directly by the U.S. Treasury. These incorporate mortgage-backed securities (MBS) offered by the Government National Mortgage Association (GNMA). This debt obligation contains a pool of mortgages, segmented by criteria, and sold to people in general with a federal guarantee.

Government-sponsored entities (GSEs, for example, the Federal Home Loan Mortgage Corporation (FHLMC) and Federal National Mortgage Association (FNMA) issue debt securities but these are not guaranteed by the federal government.