Corporate Bonds

Archive for the ‘Discount Notes’ Category

Agency Discount Notes - FAQs II

6. How are Agency discount note yields quotes?

Agency Discount Notes are quoted in terms of a discount yield, the same way as Treasury Bills. 

Agency Discount Notes can provide a significant yield advantage over Treasury Bills, as shown, for example: 

	US T Bills	Agency Discount Notes	Yield Advantage
3-month	1.10%	1.20%	9%
6-month	1.15%	1.25%	9%

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7. What type of investor might be interested in Agency Discount Notes?

Individuals seeking a short term cash equivalent investment, who place a high priority on principal preservation and want yields that are higher than those available through Treasury Bills. 

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8. Which Agencies feature tax exemptions?

Interest on FFCB and FHLB issues is generally state and local tax free. 

This provides a yield advantage over fully taxable securities and is especially appealing to residents of high-tax states. FHLMCs and FNMAs are fully taxable. 

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9. What are their minimum investment requirements?

Minimums range from $1,000 to $100,000, depending on the issue. 

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10. How liquid are Agency Discount Notes?

The Agency market is active enough to provide liquidity for investors who choose to sell their Discount Notes before maturity.

Agency Discount Notes � FAQs

1. What are Agency Notes?

Agency Notes are debt instruments by U.S. government sponsored enterprises raise capital for their operations. 

Examples such enterprises include: 

• Fannie Mae (FNMA)
• Federal Home Loan Mortgage Corporation (FHLMC, or Freddie Mac)
• Federal Home Loan Banks (FHLB)
• Federal Farm Credit Banks (FFCB)

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2. Are Agencies' credit quality as high as Treasuries?

Almost. 

They are not government guaranteed, but the issuers maintain a direct line of credit with the U.S. Government. 

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3. Can Agency Discount Notes settle for cash?

Yes. 

Due to their short-term nature there some maturities that settle same day. 

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4. How do Agency Discount Notes work?

Agency Discount Notes are similar to Treasury Bills in that they are sold at a discount, mature at face value (par) and pay no coupon interest. 

The difference between the discounted purchase price and par value is known as accreted interest, and is paid to investors at maturity. 

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5. Are investors compensated for accepting a slightly higher credit risk?

Yes, in the form of a yield advantage over Treasuries. 

Question 6 indicates the advantage that Agency Discount Notes provide over Treasury Bills, based on recent market conditions. Click here to go to Questions 6 - 10.