Government Securities
Description
This article is from the Investing Articles: Bonds series.
Government Securities
Government Securities
U.S. Government securities are the safest of all the bonds in circulation. They have direct government backing or in the case of federal agencies, a moral guarantee. Most government issues trade in the secondary or capital market. Although some trade in the Money Market.
U.S. Treasury Bills
Treasury Bills have maturities of 3 months and 6 months. They are auctioned once every week. Once every month 1 year T-Bills are auctioned. These are a direct short term obligation of the U.S. government. T-Bills do not pay interest. They are purchased at a discount. For example, one might buy a $10,000 three month T-Bill for $9,700. The investor would then receive $10,000 when the T-Bill reached maturity in 3 months. T-Bills are the only Treasury security issued at a discount. They are also the only Treasury security issued without a stated interest rate. The interest rate is determined at auction. T-Bills are also offered in Book Entry form only. The investor does not receive a certificate. T-Bills are also highly liquid.
U.S. Treasury Notes
U.S. Treasury Notes are direct obligations of the U.S. government. These notes have maturities from one year to ten years. T-Notes pay interest on a semi-annual basis. T-Notes always expire at par value. The different length notes are auctioned at different periods throughout the year.
U.S. Treasury Bonds
Treasury Bonds are direct obligations of the U.S. government. They pay interest on a semi-annual basis. These have long term maturities. They mature in 10 years to 30 years. 30 year T-Bonds are callable beginning 5 years prior to maturity.
Federal Land Banks
The Farm Credit Association supervises these. Loans are made to farmers and ranchers. They are secured by mortgages made by Federal Land Banks through the Federal Land Banks Association. These are not direct obligations of the U.S. government. They are, however, considered moral obligations of the U.S. government. Interest received by investors is free from state and local taxes but not federal income tax.
Federal Intermediate Credit Bank (FICB)
The FICB is a group of twelve banks authorized to make loans to farmers. The money is to be used for expenses, machinery, and livestock. The loans may not run for more than 10 years. These are not direct obligations of the U.S. government. They are, however, considered moral obligations of the U.S. government. Interest received by investors is free from state and local taxes but not federal income tax.
Bank for Cooperatives
The Farm Credit Administration runs these. The banks make loans to farm cooperatives. Interest received by investors is free from state and local taxes but not federal income tax.
Federal Home Loan Banks (FHLB)
The Federal Home Loan Bank Board supervises these. This agency is what backs up the nations Savings & Loan banks. Over 98% of the total assets of all Savings & Loans in the country are held by these banks. The FHLB's loans to member banks to augment their deposits. Simply put, the FHLB issues debt securities in the open market to loan to the S&L's who loan this money to their customer's to buy homes. Interest received by investors is free from state and local taxes but not federal income tax.
Federal National Mortgage Association (Fannie Mae)
Previously, Fannie Mae was a government owned corporation. However, in 1968, it was converted to a privately held corporation whose stock trades on the New York Stock Exchange. The purpose of Fannie Mae is to buy and sell real estate mortgages. Primarily, these mortgages are guaranteed by the Federal Housing Authority (FHA) and the VA. Fannie Mae gets the resources to purchase these mortgages from private investors and from borrowing from the Treasury Department. Fannie Mae issues mortgaged backed bonds which can be purchased by investors. However, and this is the only case where this is true, the Fannie Mae mortgage backed bonds are subordinated to regular debentures. Fannie Mae bonds pay semi-annual interest and are regarded as quite safe.
Government National Mortgage Association (GNMA's or Ginnie Mae)
When the government split off Fannie Mae into a private corporation, it split Fannie Mae into two parts. Ginnie Mae is the second part. Ginnie Mae is wholly owned by the U.S. government. Ginnie Mae issues 'Modified Pass Through certificates'. These certificates represent an interest in a pool of mortgages. The pool includes mortgages from the VA, FHA insured mortgages, and Farmers Home Administration guaranteed mortgages. As people make their mortgage payments, the proportionate share passes through to the investor. Payments to the investor are paid monthly. Each payment the investor receives is part interest and part principal. After all, when a person pays their mortgage, they are paying part interest and part principal. The minimum denomination is $25,000. These bonds are backed by the full faith and credit of the U.S. government. The interest is subject to state and local taxes.
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