When you're a big dog like the federal government and want to issue bonds or T-Bills, you guarantee your paper with the right of the government to tax its people.
But what happens when you're a medium-sized dog...like a government agency? If you're Fannie Mae or another government agency, and the government won't guarantee your bonds, you can issue agency bonds.
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Finance: What is an Agency Bond?2 Views
Finance allah shmoop What is an agency bond Okay the
federal government sells a lot of paper all the time
That is it exchanges a promise to pay investors of
thousand bucks in a year in return for nine hundred
seventy two dollars today those federally backed pieces of paper
are back or guaranteed by the full faith and credit
of the us government's ability to tax it's poor hard
working and taxpaying citizens But inside of our massive government
exists all kinds of agencies particularly home and student and
you know other loan agencies who dole out money to
us citizens all the time Well fannie mae in her
brethren and while sister in is that a thing system
anyway her family of agencies while they issue paper as
well and they issue it separately from the federal government
And for the most part they're agency bonds look a
whole lot like federal bonds with one key exception They
are not backed by the federal government's full faith and
credit directly Rather they're just backed by the credit worthiness
of the agency itself backing them that is fannie mae
wants to raise cash for whatever more homes more loans
Blah blah blah It sells paper to the public and
institutions and whomever and promises to pay well basically with
a handshake That shake is based on its ability to
raise more money in the future or wine loudly enough
so that the federal government steps in and bails them
out If some one in a million crisis happens and
hello two thousand eight financial crisis we're looking at you
All right Well the basic idea here is that agency
bonds are backed by the agency itself not by the
full whammy of the full federal government so they generally
yield a skosh more interest to account for that scootch
more risk that investors take in buying them No Should
some other one in a million crisis ever happen again
So that's an agency bond not to be confused with
a bond agency which you know is the british secret 00:01:58.357 --> [endTime] service
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