Government agency bonds are AAA rated, but most are not considered drirect obligations of the US government. Many are privatized associations set up by the US to offer the various services just mentioned.

GNMA or Ginnie Mae is an agency that is a direct obligation of the government. Since these have the highest credit quality of all agency bonds, they tend to offer the lowest rate of return - when compared to other federal bonds.

These Federal Bonds can be issued by:

• Ginnie Mae GNMA
• Fannie Mae FNMA
• Sallie Mae SLMA
• Freddie Mac FHLMC

Others bonds are issued by FHLB, FFCB and a few others.

Types of Agency Bonds

Straight Debt Obligation - These bonds are backed by the full faith and credit of the agency and generally pay interest from a nominal yield every 6 months with a fixed maturity where the par value is redeemed. These are typical structures that are common in other forms of issuers, such as corporations and municipal issuers.

Pass Through Securities - These bonds are backed by the full faith and credit of the agency as well, but the payments and eventual pay-off rely on the paying back of mortgage payments issued through the agency. Ginnie Mae or another mortgage issuing agency could issue a pass through to fund the issuance of mortgages to a group of people. As the homeowner pays back principal and interest back to Ginnie Mae, Fannie Mae or whoever - the bond holders are paid.

Pass Through Bonds or Mortgage Backed Securities are normally issued as 30 year bonds, but the prepayments made by the mortgage holders or changes in interest rates will effect the speed of the payments made on the bonds. The holders will receive monthly principal and interest until their share in the bond is completed.

These bonds have a large amount of prepayment (paying too fast) or extension risk (paying too slow), because changed in interest rates, will have a potential volitile impact on the performance of the bond.

Copyright 2006 American Investment Training, Inc.