Learn the general concepts of financial markets and economy. You will see the difference between primary and secondary markets and learn about markets for different products. You will also look at various economic Indicators and their influence on the markets. After completing this course, you will have a much stronger background of financial markets and ready to go to the next stage in the Specialization. This course is designed to help students with very little or no finance background to learn the basics of investments.
2. Agency Bonds
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來自 Indian School of Business 的課程
Introduction to Financial Markets
585 個評分
Indian School of Business
585 個評分
課程 1（共 5 門，Specialization Financial Markets and Investment Strategy）
從本節課中
Fixed Income Markets
In this module you will be exposed to the fixed income markets. Various types of fixed income securities available in the market are discussed. Learners are also taught the bond terminology.
與講師見面
Vaidya NathanLecturer
Finance
Learning Outcomes.
After watching this video,
you'll be able to describe the various features of agency bonds.
You will also be able to understand and explain the advantages and
disadvantages of agency bonds.
In the world of bonds, agency bonds represent one of the safest investments,
and are often compared to treasury bonds or government securities.
Because of their low risk and very high liquidity.
Now, unlike government bonds, which are issued only by the government,
agency bonds come from several sources.
Including not just government agencies but
also certain corporations that have been granted a charter by the government.
The best known agency bonds are sold by the Government National
mortgage association, commonly called as Ginnie Mae.
The Federal National Mortgage Association commonly called as Fannie Mae,
and the Federal Home loan Mortgage Cooperation,
commonly known as Freddie Mac.
The key difference between say a Ginnie Mae and Fannie Mae and
Freddie Mac is that the Fannie Mae and the Freddie Macs
are government sponsored enterprises, called as GSEs.
But only Ginnie Mae securities are explicitly
backed by the full faith and credit of the US government.
Not all agency bonds are issued by government agencies,
though they are called agencies.
In fact the largest issuers are not agencies per se, but
rather government sponsored entities or GSEs.
Now there is an important distinction because true
agencies are explicitly backed by the full faith and credit of the US government.
Making their risk of default virtually negligible or
as low as the government bonds or government debt.
So while GSEs or government sponsored enterprises are private corporations that
hold government charter which has been granted, and it's been
granted because of their activities have been deemed important for public policy.
Now among other things, corporations provide these government sponsored
enterprises, provide home loans, farm loans, student loans.
They help finance international trade.
And because the government typically would place special
emphasis on these activities by the GSEs, it grants charter.
And the bond market believes that the government would not
allow charter holding enterprises, firms, or GSE's to fail.
And therefore they have the implicit guarantee,
the government is essentially providing an implicit guarantee to
the Government Sponsored Enterprises even though they are private corporations.
So although agency bond traders recognize this distinction between true agencies and
GSEs, for instance Ginnie Mae and Fannie Mae, when you're buying or selling bonds,
but yields for both kinds of debt tend to trade virtually identical.
So if you picked up the newspaper and
the newspaper market data page will have the prices and
yields of securities from Ginnie Mae, Fannie Mae, Freddie Mac, and so on.
You would find that the difference between the returns or the yields that you
get from Ginnie Mae which has explicit guarantee from the US government and
Fannie Mae which only has an implicit guarantee from the US government.
The spreads are almost negligible.
So now even though you know agencies in general carry government guarantee,
implicit or explicit, agency bonds tend to trade at a premium or
a spread about comparable government bonds or treasury bonds.
Now, a couple of reasons why investors expect a higher return on
agency bonds vis-a-vis treasuries.
Firstly, now there are some additional risks, however little,
because it's stemming from political risk that
the government guarantee of agency that could be modified or
revoked in the future, leaving the bondholders more susceptible to default.
So it's possible that the guarantees may be revoked in the future
because of change of government, change of economic environment, and so on.
The second reason is that treasury bonds, or a government debt, is arguably
the most liquid financial instrument on the planet and or at least in the market.
And are used by central banks and very large institutions,
financial institutions, requiring the ability to buy or
sell securities in vast quantities very quickly and efficiently.
So they're extremely liquid.
Agencies, on the other hand, are not as liquid as government debt.
And they are not as efficient in terms of trading as government debt.
So, now a large portion of, one of the distinction between government debt and
agencies is that a large portion of agency debt is callable.
Now, which can be a good thing for you, because if, let's say,
the debt is callable and the agencies have the right to call the security,
they normally would provide a slightly higher return to compensate you for
the risk of the fact that the bond may be called.
Now since callable bonds contain this embedded call option,
which is exercisable by the seller, they, as I said, typically carry a higher
yield to compensate you for the risk for holding this bond which can be called.
Now, some callable agency bonds are callable any time,
while some are only callable only monthly or quarterly,
or even on some specific dates prior to maturity.
Agency bonds give individuals and institutions the opportunity to
get a higher return vis-a-vis compared to treasury bonds
while sacrificing very little in terms of risk or liquidity.
So you, by investing in agencies, you get pretty high returns,
while, as compared to treasuries while taking a very marginal or
incremental risk compared to government debt.
So agencies are a very important class of instruments in the bond markets,
and they are only next to government debt in terms of liquidity and size.
