Agency bond

Definition

Agency bond in plain English

An agency bond is an IOU issued not by the U.S. government directly, but by special companies the government created to serve public goals — like Fannie Mae and Freddie Mac, which help make home loans more available. Because everyone assumes the government would step in to help these companies if they got into trouble, investors treat their bonds as very safe — nearly as safe as lending to the government itself. That perceived safety means they pay a bit more interest than pure government bonds but less than ordinary company bonds. Think of it as a loan to a quasi-official organization with the government standing nearby as an unofficial backstop.

Related Principles of Finance terms

• American option
• Arbitrage pricing theory (APT)
• Asset-backed security (ABS)
• Basis risk
• Bid-ask spread
• Bookrunner
• Carhart four-factor model
• Clientele effect
• Collateralized debt obligation (CDO)
• Common-size analysis