Federal Agency Issue
Definition
A Federal Agency Issue or Federal Agency Security is a debt instrument issued by an agency of the federal government. These securities are typically sponsored by the government but are not general obligations of the U.S. Treasury. Due to this indirect government backing, federal agency securities are generally considered to have high credit ratings, signifying a low default risk.
Examples
- Federal National Mortgage Association (FNMA): Commonly known as Fannie Mae, this agency creates and guarantees mortgage-backed securities, providing liquidity to the mortgage market.
- Federal Farm Credit Bank (FFCB): This agency issues bonds to support agricultural lending institutions, helping farmers and agribusinesses gain access to affordable credit.
- Tennessee Valley Authority (TVA): The TVA issues bonds to finance energy infrastructure projects, promoting economic development in the Tennessee Valley region.
Frequently Asked Questions (FAQs)
Q1: Are federal agency securities backed by the U.S. government? A1: While they are not direct obligations, federal agency securities are sponsored by the U.S. government, giving them high credit ratings.
Q2: How do federal agency securities compare to U.S. Treasury securities? A2: Treasury securities are direct obligations of the U.S. government and consequently have slightly higher creditworthiness. Federal agency securities, while high-rated, are sponsored rather than directly backed.
Q3: What are the benefits of investing in federal agency securities? A3: Investors benefit from low default risk and relatively attractive yields compared to some other government securities, making these an appealing option for conservative investors.
Q4: How is the interest from federal agency securities taxed? A4: Interest earned is typically subject to federal income tax but may be exempt from state and local taxes. Specific tax treatment can vary by agency and security type.
Q5: Are federal agency securities liquid investments? A5: Yes, federal agency securities generally offer a high degree of liquidity as they are often actively traded in the secondary market.
Related Terms
- Government-Sponsored Enterprises (GSEs): Financial services corporations created by the U.S. Congress. Examples include Fannie Mae and Freddie Mac.
- Mortgage-Backed Securities (MBS): A type of asset-backed security secured by a collection of mortgages.
- Treasury Securities: Debt financing instruments issued by the U.S. Department of the Treasury, including Treasury Bills, Notes, and Bonds.
- Corporate Bonds: Debt securities issued by corporations to fund business activities, typically riskier than government securities.
Online References
- Investopedia: Federal Agency Security
- Federal National Mortgage Association (Fannie Mae)
- Federal Farm Credit Bank (FFCB)
- Tennessee Valley Authority (TVA)
- U.S. Securities and Exchange Commission (SEC): Corporate Bonds
Suggested Books for Further Studies
- “The Bond Book: Everything Investors Need to Know About Treasuries, Municipals, GNMAs, Corporates, Zeros, Bond Funds, Money Market Funds, and More” by Annette Thau
- “Bonds: The Unbeaten Path to Secure Investment Growth” by Hildy Richelson and Stan Richelson
- “The Handbook of Fixed Income Securities” by Frank J. Fabozzi
- “Investment Analysis and Portfolio Management” by Frank K. Reilly and Keith C. Brown
Fundamentals of Federal Agency Issue: Finance Basics Quiz
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