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Agency bonds are typically pools of like assets - such as auto loans, student loans, and mortgages. The mortgage pools sold by home lending companies such as Fannie Mae and Freddie Mac are the most common example. Since they are frequently backed by loan pools, agency bonds usually have the unique aspect of self-amortizing. That is, each bond payment includes a portion of the principal AND the interest. Their is NOT a lump sum of principal paid at the end.
Fannie Mae is a special case. Since they are backed by the full faith and credit of the US federal government, they are extrmely safe. Interstingly, they typically pay slightly higher interest rates than actual US treasuy bonds which carry nearly identical risk.
An advantage of agency bonds is that they bring together a pool of assets that could not otherwise easily traded. They are relatively low risk, as pools purposefully balance the risk of the contained assets. That is, they group high risk loans with low risk loans so that the pool as a whole is only a moderate risk.
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