Agency Debentures
"Agency debentures" is another way to say "government bonds."
"Agency" just refers to an agency of the government, such as the Treasury Department. "Debentures" is the lowest rung of bond on the debt stack of priority payback should the B word be introduced (rhymes with shmankruptcy). A debenture typically has no specific asset backing it. Rather, it's a handshake on paper that just says, "I promise to pay." So investors evaluate how much that promise is worth and/or how much it hurts the promisor, should they ever break it.
To understand how agency debentures are different from typical bonds, we'll break things down a bit more.
Bonds are a type of loan. Rather than negotiating with a bank, an organization will issue a set of bonds with set terms, like a maturity date and an interest rate, and make them available for people to purchase. Unlike stock, bond buyers don't own part of the company. Instead, they are owed money as a creditor, the same way a bank would if it issued a loan.
When a company issues a bond, that bond is backed by company assets. If the company files for bankruptcy or otherwise defaults on the bond, creditors have a course of action. In the worst case scenario, company assets are sold off and bond holders are repaid as best they can from that money.
Things are different for government bonds. Government bonds aren't backed by assets the same way a corporate bond is. If the U.S. government defaults, creditors can't just sell off the White House and Yellowstone National Park and call it even. Instead, government bonds are backed by the "full faith and credit" of the government, which is another way of saying, "we super promise to pay you back, but if not, we own a bunch of tanks, sooooo..."
Agency bonds sit somewhere in between all of this government paper and priority stack. They aren't quite the full faith and credit safety of Uncle Sam's ability to tax us. They are backed by the agency issuing them inside of the protected tent of Uncle Sam.
Related or Semi-related Video
Finance: What are Secured Bonds v Unsecu...51 Views
finance a la shmoop what are secured bonds versus unsecured bonds and
debentures okay so that's an insecure bond but we're talking about here is an [Insecure bond hiding under the sheets]
unsecured bond what is an unsecured bond well this is that was an unsecured bond
old school like 15 century old school it was just a handshake one guy promised to [People shake hands]
pay back another 400 pounds of barley in return for three sheep next year or
something like that and the sheep were the payment form not the guarantee and
the bond was loan emic bond ursins word in fact the promise to pay was secured
but by his word or commitment to repay the loans kind of old school debenture
unsecured bonds work similarly today corporations sell debentures to Wall [Corporations sending debentures to Wall St]
Street all the time debenture being a fancy word for an
unsecured bond it's just debt that the company promises [Definition of debenture]
to pay back well if they don't then oh well and yes the debenture holders could
in theory then take ownership of the equity of the company but in reality [Debenture holders take the majority of the company equity pie chart]
unsecured bonds when not paid back almost always mean the death of the CEOs
career and likely also of the careers of all the other members of the management [Gravestones for the management board]
team so while unsecured bonds are notionally more risky than secured bonds
well this issue hasn't been tested all that often in real life okay so if
that's an unsecured bond what's a secured bond well it's one that
is secured by a specific asset or value or other stores of wealth which get [Definition of secured bonds]
forfeited if the lendee doesn't pay back the lender on time and in accord with
the terms of the debt deal example the dung and the restless' is a company that [Sign for 'The Dung and the Restless']
makes fertilizer by collecting old political speeches and grinding them up [Speeches going into the grinding machine]
selling them to farmers in the Midwest you know for a coin but they also own a [Tractor spraying crops]
pork farm which is kind of separate from their main fertilizer biz they need [Hogs Gone Wild logo appears]
money to build a bigger grinder because politicians are giving more speeches
these days you the internet and all that and they [Politician being applauded]
pledged their pork farm as collateral behind that secured bond offering that [Collateral sign on the pork farm]
is if they don't pay back the bond interest and principle on time then they
lose the pork farm to the lenders yeah and that would be a pig mistake... [Guy snorts like a pig]
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