It may sound like a term dripping with intrigue and danger, maybe referring to a project that guarantees the security of highly trained special agents as they work deep under cover in some volatile overseas terrorist cell.
But, nah...it's really about bonds.
An "agency security" is a security, like a bond or a note, issued by one of the so-called government-sponsored enterprises, or GSEs. These companies were created by Congress to help foster home ownership. But while they were government-created, they don't fall directly under government control.
There aren't many of these firms, just three in fact: the Government National Mortgage Association, also known as Ginnie Mae; the Federal Home Loan Mortgage Corporation, or Freddie Mac as it's known on the street; and the Federal National Mortgage Association, which goes by the nom de guerre Fannie Mae.
The government has made no explicit promise to back the bonds issued by these organizations. But because of their history as government creations, Wall Street assumes the government would step in if needed. (This took place in some degree during 2009 and 2010, in the aftermath of the financial crisis. See: Agency MBS Purchase.)
This not-actually-but-sort-of-anyway government backing allows the agency securities to have an extremely high credit rating.
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Finance: What are Bonds?393 Views
Finance a la shmoop what is a bond? well a bond is your word your promise your [Women shake hands]
handshake your John Hancock on a contracted piece of paper your mortgage
your credit card debt yeah their bonds to your "I swear I'm not a deadbeat"
declaration... that's your bond right well bonds come [Man lying on a sofa]
in many complex flavors and compositions simply put bonds are loans aka debt you
borrow money or you promise or you you bond that
you'll pay it back when you borrow money the amount you borrow is called the
principal you pay rent on that amount borrowed and that rent is called [rent appears at bank]
interest to the entity loaning you the money that interest is called yield
thank you very much for the yield like if the lender rents you a grand for a
year and you pay them a thousand 80 bucks at year-end paying back the
principal and then the rent on the money while the lender will have had a yield [Yield of lender appears]
of 8% on the grand that they loaned you so that's a bond you borrow money you
pay it back and if you don't the person who loaned you the dough well they [Person stamped with property of shmoop bank]
generally own your tuchus and yeah you know what Shakespeare said about bonds
yeah that's what he said so if you don't really know what you're doing don't do
it...
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