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.
- 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
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
### Are Federal Agency Issues direct obligations of the U.S. Treasury?
- [ ] Yes, they are directly backed by the U.S. Treasury.
- [x] No, they are not direct obligations but are sponsored by the government.
- [ ] It depends on the issuing agency.
- [ ] They are only backed if specified by Congress.
> **Explanation:** Federal agency issues are not direct obligations of the U.S. Treasury. They are issued by federal agencies and are instead sponsored by the government, which provides them with high credit ratings.
### Which federal agency is known for issuing mortgage-backed securities?
- [x] Federal National Mortgage Association (Fannie Mae)
- [ ] Federal Farm Credit Bank
- [ ] Tennessee Valley Authority
- [ ] U.S. Department of the Treasury
> **Explanation:** The Federal National Mortgage Association (Fannie Mae) is well-known for issuing and guaranteeing mortgage-backed securities, providing liquidity to the mortgage market.
### Which type of agency securities may help fund agricultural enterprises?
- [ ] Fannie Mae
- [x] Federal Farm Credit Bank
- [ ] Tennessee Valley Authority
- [ ] Treasury Bonds
> **Explanation:** The Federal Farm Credit Bank (FFCB) issues bonds to support agricultural lending institutions, aiding farmers and agribusinesses.
### What is the primary advantage of federal agency securities over U.S. Treasury securities?
- [ ] Higher default risk
- [ ] Less liquidity
- [x] Usually, slightly higher yields
- [ ] Direct government backing
> **Explanation:** Federal agency securities often offer slightly higher yields compared to U.S. Treasury securities, despite being sponsored rather than directly backed by the government.
### Can interest from federal agency securities be exempt from state and local taxes?
- [x] Yes
- [ ] No
- [ ] Only for certain agencies
- [ ] Only for bonds held longer than 10 years
> **Explanation:** Interest from federal agency securities can be exempt from state and local taxes, although federal income tax usually applies.
### Which federal agency focuses on financing energy infrastructure projects?
- [ ] Fannie Mae
- [ ] Federal Farm Credit Bank
- [x] Tennessee Valley Authority
- [ ] Freddie Mac
> **Explanation:** The Tennessee Valley Authority (TVA) issues bonds to finance energy infrastructure projects, promoting economic development in the Tennessee Valley region.
### Do federal agency securities generally have good market liquidity?
- [x] Yes, they are typically actively traded.
- [ ] No, they are rarely traded.
- [ ] Only those from major agencies have good liquidity.
- [ ] Liquidity depends on prevailing market conditions only.
> **Explanation:** Federal agency securities generally offer a high degree of liquidity because they are often actively traded in the secondary market.
### What is one risk associated with federal agency securities?
- [x] They are not direct obligations of the U.S. Treasury.
- [ ] They have low credit ratings.
- [ ] They provide low yields.
- [ ] They are exclusively long-term investments.
> **Explanation:** Since federal agency securities are not direct obligations of the U.S. Treasury, they come with a degree of risk, though they still generally have high credit ratings.
### Who typically issues federal agency securities?
- [ ] U.S. local municipalities
- [x] Agencies of the federal government
- [ ] National banks
- [ ] Private equity firms
> **Explanation:** Federal agency securities are issued by agencies of the federal government, such as the Federal National Mortgage Association (Fannie Mae) and the Tennessee Valley Authority (TVA).
### What defines the credit rating of federal agency securities?
- [ ] Direct control by federal reserve
- [x] Government sponsorship
- [ ] Market demand
- [ ] Private sector evaluations
> **Explanation:** The high credit ratings of federal agency securities are due to the sponsorship by the government, even though they are not backed as direct obligations of the U.S. Treasury.
Thank you for studying this comprehensive guide on Federal Agency Issues. We hope the information and quiz have enhanced your understanding and knowledge of finance!
