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Bonds

Government and Agency Securities

Government Treasury Issues

The U.S. Department of Treasury issues debt securities as an efficient means of financing federal government operations at the lowest possible cost to taxpayers. The U.S. Treasury issues several different types of securities: bills, notes, bonds Inflation-Indexed Securities, and Zero-Coupon Treasury (or STRIPS). The U.S. Treasury is the largest issuer of debt securities in the world. Since these issues carry the "full-faith, authority, credit and taxing power" of the U.S. Government, they are considered among the safest investments available. Additionally, U.S. Treasury issues are highly liquid, as there is always a market for them. Consequently, all of the Treasury issues are very popular with investors. Morgan Keegan trades all government securities and can participate in any Treasury auction.

  • Treasury Bills -- Treasury bills are issued with maturities ranging from 7 days to 180 days. Treasury bills do not have a coupon (or stated interest rate). Rather, they are sold at discounts from their face value. When the bills mature, you will receive the face value of the bill. The difference between the amount paid and the face value represents the interest earned on the investment.
  • Treasury Note -- Treasury Notes have maturities up to 10 years. Treasury notes have a fixed coupon from which interest is payable semiannually. Treasury notes are available in $1,000 minimum denominations and and $1,000 increments. Because of the longer maturity dates, Treasury notes usually carry a higher yield than Treasury bills.
  • Treasury Bond -- Treasury bonds are issued in longer maturities (usually 30 years) and are similar to any other kind of bond you may purchase. They carry fixed rates of interest and fixed maturity dates. Since bonds are outstanding for a longer term than bills or notes, their yields are typically higher.
  • Inflation Indexed Securities (TIPS) -- The U.S. Treasury Department began offering a new type of security referred to as a Treasury Inflation-Indexed security in January 1997. A direct obligation of the U.S. Government, interest is paid every six months based on a fixed rate of interest that is determined at auction. Because of the tax treatment of these securities, tax-advantaged purchasers, such as qualified pension funds and tax-deferred retirement accounts, including 401(k) plans and IRAs, may find this type of security an appropriate investment.
  • Zero-Coupon Treasury or Stripped Treasury (STRIPS) -- An acronym for Separate Trading of Registered Interest and Principal of Securities, the Treasury STRIPS program was introduced in February 1985. The program allows investors to hold and trade the individual interest and principal components of eligible Treasury notes and bonds as separate securities. The principal payment and each interest payment becomes a separate zero-coupon security with its own identifying number that can be held or traded separately. STRIPS are also called zero-coupon securities because the only time an investor receives a payment during the life of a stripped security is when it matures. Although the investor never receives any cash flow until the security matures, the investor does have to pay taxes on the accreted (ever-increasing book value from purchase price to par or 100% or $1,000) value each year.

U.S. Agency Bonds

In addition to the U.S. Department of the Treasury, a number of government agencies also issue bonds and notes. While Agency issues are not government guaranteed, they are issued by government-sponsored enterprises and backed by the agency that issues them. Therefore, agencies are a sound investment and one of the most popular fixed income investments. They provide incrementally higher yields than Treasuries with very little credit risk. Morgan Keegan ranks 13th nationally in the underwriting of these types of securities. The federal agency market includes debt securities issued by the following:

  • Federal National Mortgage Association (Fannie Mae)
  • Federal Home Loan Mortgage Corporation (Freddie Mac)
  • Federal Farm Credit System
  • Student Loan Marketing Association (Sallie Mae)
  • Small Business Administration
  • Tennessee Valley Authority