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 Planning

Treasury Bills

TREASURY BILLS
Treasury bills represent short term government financing and mature in twelve months or less. The treasury auctions these bills to the highest bidder and no set amount of interest is paid. The yield is the difference between the bid price paid and the face amount of the security received at maturity. They are bought and sold in the secondary market and prices are quoted each day in the financial press.

Treasury bills are issued in book entry form and maybe purchased directly from the Federal Reserve Bank, a commercial bank, or a brokerage firm. They are ideal for investors who wish to have safety and liquidity. Treasury bills are also an excellent vehicle for tax deferral, since interest earned on them is taxed in the year the bill matures, rather than the year of purchase

Treasury Notes and Bonds
Treasury Notes mature in one to ten years and treasury bonds mature in ten years or longer. Notes and bonds may be purchased from the Federal Reserve Bank, commercial banks, or brokerage firms. The securities are marketable and are quoted in the financial press. These investments are considered to be very safe because they are issued by the U.S. Treasury. As a consequence, their yields are lower than those of high quality corporate debt.   These debt instruments pay a fixed rate of interest.  Should interest rates rise and the investor need to sell the notes or bonds before maturity, the investor could suffer a loss on the investment.

US AGENCY ISSUES (for income and safety of principal)

GNMA
The Government National Mortgage Association is a wholly owned corporate instrumentality of the United States within the Department of Housing and Urban Development. GNMA is authorized to guarantee, with the full faith and credit of the United States Government, the timely payment of principal and interest on securities issued by institutions approved by GNMA (such as savings and loan institutions, commercial banks, and mortgage bankers) and backed by pools of FHA insured or VA guaranteed mortgages.   "Ginnie Mae's" represent pools of 25 to 30 year FHA or VA mortgages guaranteed by GNMA.

The originator of the loans issues a certificate collateralized by the portfolio of mortgages. Like bonds, "Ginnie Maes" are issued in specified face amounts with set interest rates.

The full return of principal and prompt payment of interest are guaranteed by the full faith and credit of the U.S. government. Monthly mortgage payments, less a half percent service charge, pass through to the "Ginnie Mae" holders. Like the mortgages they represent, "Ginnie Maes" are self liquidating. Over time, the principal will be repaid in full and the interest payments will cease.  Just like the under lying mortgages, the proportion of the monthly payments representing principal will increase while the proportion representing interest will decline.

"Ginnie Mae's" trade actively on the open market and rise and fall in value inversely to interest rate fluctuations. As interest rates go up, the investor will suffer price depreciation on the security itself but will be able to invest the monthly proceeds at higher rates. If rates drop, the "Ginnie Mae" appreciates in price but the owner of the certificate will be reinvesting his or her monthly proceeds at a lower rate.

Although the mortgages backing the "Ginnie Mae's" have a maximum maturity of 30 years, some will be paid off substantially sooner. The average life of a GNMA is approximately 12 years. Uncertainty about the actual maturity of "Ginnie Mae's" can make it difficult to accurately compare yields on alternative investments.  One way of avoiding this prepayment risk is through investment in a REMIC.

"Ginnie Maes'' issued in one million dollar pools are bought by brokerage houses and sold to the general public in $25,000 denominations. To further reduce the cost of participating in the "Ginnie Mae" market and thus widen the customer base, brokerage houses sell "Ginnie Maes" in unit investment trusts requiring a minimum investment of $1,000. FNMAs and FHLMCs.

Government related (not backed by the full faith and credit of the U.S. Government) guarantors include the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation The FNMA ("Fannie Mae") is a government sponsored corporation owned entirely by private stockholders. It is subject to regulation by the Secretary of Housing and Urban Development.
FNMA purchases residential mortgages from a list of approved sellers which include state and Federally chartered savings and loan associations, mutual
savings banks, commercial banks, and credit unions.  Pass through securities issued by the FNMA are guaranteed as to timely payment of principal and interest by the FNMA.

The FHLMC ("Freddie Mac") was created by Congress in 1970 for the purpose of increasing the availability of mortgage credit for residential housing. Its stock is owned by the twelve Federal Home Loan Banks. FHLMC issues Participation Certificates which represent interests in mortgages from FHLMC's national portfolio. FHLMC guarantees the timely payment of interest and the ultimate collection of principal but Participation Certificates are not backed by the full faith and credit of the U.S. Government.

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