U.S. Government Services
United States Government Securities have a faultless history of repayment. In addition, government securities offer high liquidity, a wide range of maturities, reliable income, and in some cases, freedom from state and local income taxes.
Treasury Bills, Notes, and Bonds, and Federal Agency Securities
If you prefer semi-annual interest payments that are free from state and local income taxes, consider U.S. Government Treasury Notes and Bonds. These securities, like Treasury Bills and STRIPS, are backed by the “full faith and credit” of the U.S. Government. They offer maturities of one to 30 years as well as high degree of liquidity.
If your primary investment goal is preservation of capital, consider Treasury Bills or Government STRIPS. These investments, also exempt from state and local taxes, are sold at discounts to their face values. For instance, an investor may pay $250 for a STRIP that is worth $1,000 at maturity in 15 years. T-bills and STRIPS forego all interest payments until maturity. Treasury bills have maturities of one year or less while maturities for STRIPS range from one to 30 years (for this reason, STRIPS are often a popular choice for building college or retirement funds).
Many federal agencies offer a wide variety of securities that offer higher investment yields than Treasuries. For example, the Government National Mortgage Association (GNMA) is an agency established to finance single family housing. These mortgages are pooled together and sold to investors. Unlike other government agency issues, GNMAs offer “full faith and credit” backing by the U.S. Government. GNMA’s monthly payments consist of both interest and principal, just as homeowner’s monthly mortgage payment includes accrued interest and a portion of the principal.
Federal agencies such as the Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corp. (FHLMC) are fully taxable issues, while Federal Home Loan Bank (FHLB), Federal Farm Credit Bank (FFCB), and Student Loan Marketing Association (SLMA) offer income exempt from state and local taxes. Issuers pay monthly or semi-annual interest, with principal returned at maturity.
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