The Theory and Practice of Investment Management: Asset Allocation, Valuation, Portfolio Construction, and Strategies, Second Edition

FEDERAL AGENCY SECURITIES

Federal agency securities can be classified by the type of issuer, those issued by federally related institutions and those issued by government sponsored enterprises. Federally related institutions (also referred to as government-owned agencies) are arms of the federal government and generally do not issue securities directly in the marketplace. The major issuers have been the Tennessee Valley Authority (TVA) and the Private Export Funding Corporation. With the exception of securities of the TVA and the Private Export Funding Corporation, the securities are backed by the full faith and credit of the United States government.

Government sponsored enterprises (GSEs) are privately owned, publicly chartered entities. They were created by Congress to reduce the cost of capital for certain borrowing sectors of the economy deemed to be important enough to warrant assistance. GSE securities are not backed by the full faith and credit of the U.S. government. Consequently, investors purchasing GSEs are exposed to credit risk.

The securities issued by GSEs are one of two types: debentures and mortgage-backed/asset-backed securities. Debentures do not have any specific collateral backing the bond. The ability to repay bondholders depends on the ability of the issuing GSE to generate sufficient cash flows to satisfy the obligation. Several GSEs are frequent issuers of securities and therefore have developed regular programs for securities that they issue.