how agency bonds work
most agency bonds pay a semi annual fixed coupon they are sold in a variety of increments generally with a minimum investment level of 10 000 for the first increment and 5 000 for additional increments gnma securities however come in 25 000 increments some agency bonds have fixed coupon rates while others have floating rates the interest rates on floating rate agency bonds are periodically adjusted according to the movement of a benchmark rate such as libor like all bonds agency bonds have interest rate risks that is a bond investor may buy bonds only to find that interest rates rise the real spending power of the bond is less than it was the investor could have made more money by waiting for a higher interest rate to kick in naturally this risk is greater for long term bond prices types of agency bondsthere are two types of agency bonds including federal government agency bonds and government sponsored enterprise gse bonds federal government agency bonds are issued by the federal housing administration fha small business administration sba and the government national mortgage association gnma gnmas are commonly issued as mortgage pass through securities like treasury securities federal government agency bonds are backed by the full faith and credit of the u s government an investor receives regular interest payments while holding this agency bond at its maturity date the full face value of the agency bond is returned to the bondholder federal agency bonds offer a slightly higher interest rate than treasury bonds because they are less liquid in addition agency bonds may be callable which means that the agency that issued them may decide to redeem them before their scheduled maturity date a gse is issued by entities such as the federal national mortgage association fannie mae federal home loan mortgage freddie mac federal farm credit banks funding corporation and the federal home loan bank these are not government agencies they are private companies that serve a public purpose and thus may be supported by the government and subject to government oversight gse agency bonds do not have the same degree of backing by the u s government as treasury bonds and government agency bonds therefore there is some credit risk and default risk and the yield offered on them typically higher to meet short term financing needs some agencies issue no coupon discount notes or discos at a discount to par discos have maturities ranging from a day to a year and if sold before maturity may result in a loss for the agency bond investor government sponsored enterprise bonds do not have the same degree of backing by the u s government as treasury bonds and other agency bonds tax considerationsthe interest from most but not all agency bonds is exempt from local 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 redeemed capital gains or losses when selling agency bonds are taxed at the same rates as stocks tennessee valley authority tva federal home loan banks and federal farm credit banks agency bonds are exempt from local and state taxes 