Federal Government Securities - U.S. Treasuries, T-Bills, Treasury Notes, Treasury Bonds, Treasury STRIPs, Federal National Mortgage Association (Fannie Mae)

All federal government securities are considered to be quite safe, and therefore, usually have no credit rating. U.S. government securities are generally exempt from state and local taxes, but not federal taxes. While most government issues trade in the capital markets, notes that mature in a year or less are traded in the money markets. Almost all federal securities, including savings bonds, can be bought at the U.S. Treasury's new website, http://treasurydirect.gov commission-free. Ownership is determined by book-entry only, except for some savings bonds, but even these are moving more to book-entry ownership. There is more flexibility in book-entry ownership. For instance, if you buy the I bonds in certificate form, you must buy them in specific denominations that range from $50 up to $10,000, but with book-entry, you can specify an exact amount that must be $25 or more. If you want to buy a bond for $47.17, you can.

U.S. Government Savings Bonds are the most widely held federal security, but cannot be traded. Paper bonds are issued at half of their face value, book-entry bonds are issued at face value, which can be any amount over $25. However, for both paper and book-entry, $30,000 is the maximum amount that can be purchased. Although they can be cashed in early, they must be held for at least a year, and there is a penalty of 3 months interest, if cashed in before 5 years. Federal taxes are only assessed after the bond is cashed in, and there are no state or local income tax on interest, but there may be federal, state, and local inheritance, estate, and gift taxes due, if applicable.

U.S. Treasury Bills (T-Bills) are direct obligations of the U.S. government, and are highly liquid. Issued weekly to a competitive bidding process, they mature in 4, 13, or 26 weeks. They pay no interest and, unlike bonds and notes, have no specified interest rate. They are always sold at a discount. (Example: $10,000 worth of T-Bills sold for $9,750).

U.S. Treasury Notes pay semi-annual interest on the stated par value of the note; the par value is paid when the note matures in 1 to 10 years.

U.S. Treasury Bonds pay semi-annual interest, and mature in 10 to 30 years. 30 year bonds are usually callable after 25 years.

U.S. Treasury STRIPS (Separately Traded Registered Interest and Principal Securities, also called Treasury Receipts) are so called because the interest is stripped from the principal. STRIPS are sold in 2 parts, 1 part being the semiannual interest that is paid for 20 to 30 years, the other being the principal, which is sold at a discount—in essence, a zero coupon bond. Extremely volatile.

U.S. Federal Agency Securities

U.S. Federal Agency Securities are issued by U.S. Government Sponsored Agencies (GSEs) authorized by Congress to issue debt securities for their financial needs. They do not have the direct backing of the U.S. Treasury, but are considered to be moral obligations of the government. Like other federal securities, the interest from these bonds are exempt from state and local taxes, but not federal tax.

The main agencies are the Federal Farm Credit Banks and the Federal Home Loan Banks (FHLBs). Federal Home Loan Banks, operating under the Federal Home Loan Bank board, consists of most of the nation's Savings and Loans banks. The FHLB board borrows money by issuing bonds of various maturities, then lends the money to S&L banks, which then lend the money, which includes deposits from banking customers, to home buyers.

The Federal National Mortgage Association (Fannie Mae) is a government owned corporation, created in 1938, to help low- and middle-income people to buy homes. Fannie Mae buys and sells real estate mortgages that are insured by the Federal Housing Administration or guaranteed by the Veterans Administration. It sells unsecured bonds and notes, and mortgage-backed bonds, which are issued at par, pays semiannual interest, and earned interest is taxed. Ironically, interest and principal payments from unsecured notes and bonds have priority over mortgaged-backed bonds.

Privatized in 1968, equity shares of Fannie Mae trade on the New York Stock Exchange.

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Information is provided 'as is' and solely for education, not for trading purposes or professional advice.