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 T-Notes, T-Bonds and T...17 Views
Finance allah shmoop what are t notes t bills and
tips All right we'll see that tea in there Well
it stands for treasury and all of these air one
flavor or another of government debt that is the u
s government raises cash for itself teo fix roads build
bridges and erect statues of lebron james dunking on the
statue of liberty or you know whatever else he thinks
the public wants or needs it does that by auctioning
off these debt securities with the promise of its full
faith and credit to pay back the money is the
paper specifies well t notes are quote mid range unquote
paper in that they generally have maturity ease of two
three five seven and ten years that's a teen note
t notes carry a stated interest rate and look a
lot like a normal corporate bond paying interest twice a
year T bills on the other hand are generally very
short term paper usually coming due within a few days
all the way up to a year they're sold or
auctioned at a discount meaning that the t bill might
promise to pay a thousand bucks if it comes due
In six weeks you might pay nine hundred ninety six
dollars for it and you get a whopping fee Four
bucks an interest for your six weeks hard work of
owning that t bill and just you know sitting there
kind of looks like a zero coupon bond Okay so
now we have tips that's tips treasury inflation protected securities
tips as in show us your tips getting Why do
we have such a thing Well the problem with super
duper safe bonds like those of the u s government
is that investors holding them a long time often do
worse after taxes than inflation meaning that if inflation is
growing at three percent a year in their bonds are
only returning one percent a year after tax while then
the investors actually losing two percent a year in buying
power and that's a problem in nineteen nineties when investors
started to realize this issue well they began Tio you
know stop buying u s government bonds and that's a
huge problem for a country that desperately needs to borrow
cash all the time So rather than risk a liquid
marketplace where there's just no buyers buying government paper uncle
Sam created tips which basically adjust the end value of
the principle that investors get based on the c p
i or consumer price index which is a measure of
the average selling prices of a carton of milk a
gallon of fuel a dozen eggs and a grand slam
breakfast at denny's Basically what happens is that the price
of the principal the investor gets back goes up with
inflation over time So they're not losing buying power and
that's a big deal That's it go Enjoy your grand 00:02:33.995 --> [endTime] slam It'll be fourteen thousand dollars in fifty years
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