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U.S. government and federal agency securities

The United States government and The main agency issuers • Tennessee Valley Authority its agencies fund a variety of public The following are the (TVA) — TVA is the nation’s largest projects and activities by issuing government agencies that most electric utility serving a seven- bonds. U.S. government bonds are commonly issue securities: state region in the southeast. issued through the U.S. Treasury, The TVA funds its interest and U.S. government agency bonds • Federal Home Loan Bank (FHLB) payments from its revenues. are issued by the various agencies. — The FHLB system is composed • Government National Mortgage Combined, Treasury and agency of 12 regional banks and member Association (GNMA) — The bonds comprise over half of the U.S. institutions. The mission of FHLB purpose of GNMA is to provide market. Treasury bonds are is to enhance the availability liquidity to residential mortgages, attractive to investors because of of mortgage credit through specifically mortgages insured by their safety, liquidity, and state tax- its member organizations. the Federal Housing Administration exempt interest. Agency bonds are • Federal National Mortgage or guaranteed by the Veteran’s attractive to investors because of the Association (FNMA) — Publicly Administration, or the Farmers safety, liquidity, higher yields relative owned FNMA is dedicated to Home Administration. GNMA to Treasuries, and for some agencies, providing a secondary market securities carry the backing their state tax-exempt interest. for home mortgages through of the full faith and credit On September 7, 2008, the creating securities backed by an of the U.S. government. Federal Housing Finance Agency underlying pool of mortgages. They also issue direct obligation (FHFA) officially assumed direct Advantages responsibility for not only regulating bonds with interest payments but also operating Fannie Mae and paid from operating revenues. Treasury bonds and agency bonds provide investors with a . The authority to do so • Federal Home Loan Mortgage number of appealing features: was granted by Congress in July by Corporation (FHLMC) — Like the Housing and Economic Recovery FNMA, FHLMC is also publicly Act of 2008. The decision was made owned and dedicated to supplying Safety because of concerns that increasing liquidity to the residential • Treasuries — U.S. Treasury mortgage defaults had impaired the mortgage market. FHLMC also securities are considered to be the ability of the government-sponsored issues both direct “term” debt safest of all securities because enterprises (GSEs) to both maintain and mortgage-backed obligations they are backed by the full faith their required capital reserves and and pays “term” debt interest and credit of the U.S. Government. continue to support mortgage lending from its operating revenues. efforts. This move strengthens the • Government agencies — Unlike ties between the government and • Federal Farm Credit Bank System Treasury securities, government the GSEs. The market (FFCB) — The purpose of the FFCB agency bonds are not expressly consists of highly creditworthy debt is to facilitate credit and related backed by the full faith and obligations issued by various U. S. services to the agricultural sector. credit of the U.S. government, government agencies for the purpose but they do carry an implied of funding public missions. As of the backing due to the continuing ties beginning of the millennium, the between the agencies and the agency market stood at $1.4 trillion. U.S. government (except GNMA

Investment and insurance products offered through RBC Wealth Management are not insured by the FDIC or any other federal government agency, are not deposits or other obligations of, or guaranteed by, a bank or any bank affiliate, and are subject to investment risks, including possible loss of the principal amount invested. Page 2 of 4 U.S. government and federal agency securities, continued

which is expressly backed by window) or date that the bonds may a business day. Interest on the the U.S. government). Due to the be called prior to . Investors principal amount redeemed is close relationship between the who purchase a callable agency are paid up until the final redemption government and its agencies, it’s compensated with additional yield date. The one exception is if the nearly inconceivable that Congress compared to the same maturity interest payment date occurs on would allow an agency to default agency bullet (non-callable). a non-business day, which is also on its obligations as such an event the call date. In this event, interest would threaten confidence in the What types of call options exist? is paid through the last business government itself. Because of day before the redemption date. the high degree of confidence in • American call (also known as a continuously this implied government backing, When are bonds called? Moody’s assigns agency debt ) — A bond with securities a Triple-A rating, the an American can be The decision to call a bond is based highest credit rating available. called at any time after the lockout on the current level of interest rates period until the maturity date. and the outlook for interest rates. When rates fall, issuers are likely • European call option — A bond Liquidity to call the bond, pay off the debt, with a European call option Because of the vast amount of and issue a new bond at a lower is callable only on one pre- available Treasury and agency interest rate. Conversely, when rates determined date after which the securities, there is a large and rise, the call would likely not take bond becomes non-callable. active secondary market for place because the price these instruments, providing • Bermuda call option (also known would be below the call price. investors with excellent liquidity. as a discrete call) — A bond with a Bermuda call option is How are callable agency callable after the lockout period State tax-exempt interest bonds taxed? according to a pre-determined Interest payments from U.S. Treasury schedule (usually on interest All government agency securities are securities, and certain government payment dates), until maturity. subject to federal taxes. Corporations agencies, are exempt from state and individuals are taxed differently income taxes. (See the chart at the • Canary call option — A bond with at the state level. For individuals, last page of this fact sheet for a list a Canary call option is callable all Federal Home Loan Bank and of the agencies that issue state tax- after the lockout period according Federal Farm Credit Bank bonds are exempt bonds.) For investors living to a predetermined call schedule exempt from state and local taxes. in states with high income taxes, until a specific date after which Corporations may be exempt from this increases their attractiveness the bond becomes non-callable. taxes at the state and local level, on an after-tax basis when subject to blue sky laws (state laws). compared to other taxable bonds. How are calls exercised? When the bonds are not taxed at the state level, the effective yield Typically agency issues are called in is actually higher than the stated Callable agencies full, but depending on the terms of yield. The difference depends the issue, may be called in part. As Callable agency securities contain on the investor’s tax bracket. a provision that allows the issuer set forth according to the terms of to repurchase the bond from the the contract, notice of redemption Securities issued by the U.S. investor prior to the stated maturity. is communicated to the investor government and its agencies are a In other words, the issuer has the when an issue is called. Call notice common holding in many investment right, but not the obligation to call is also posted on Bloomberg. In the portfolios. For more information, the bond within a specific period case of mandatory redemption, please see the last page of this of time at a pre-determined price. notice is generally not required. fact sheet, or call your RBC Wealth Management financial advisor. At issuance, the issuer states the Most callable agencies are issued amount of time from inception with discrete call dates. Generally, a during which the bond cannot be five- to ten-business day notification called (the lockout period) and the of a call must be given. Redemption specific period of time (callable of principal is always made on Page 3 of 4 U.S. government and federal agency securities, continued

Security Denomination Form Guarantee Purchased Interest Maturity State and paymnet range local taxes schedule Government securities Full faith and U.S. Treasury $100 ($100 Face value One day to Book entry credit of U.S. Discounted Exempt bills minimum) at maturity one year government Market sets Full faith and U.S. Treasury $100 ($100 price at par, One to 10 Book entry credit of U.S. Semi-annual Exempt notes minimum) discount, or years government premium Market sets Issued with Full faith and U.S. Treasury price at par, maturities $100minimum Book entry credit of U.S. Semi-annual Exempt bonds discount, or beyond 10 government premium years Market sets Full faith and U.S. Treasury the price Face value Three months $100 minimum Book entry credit of U.S. Exempt STRIPS (zeros – at maturity to 30 years government discounted) Treasury Market sets Inflation Full faith and price at par, Five to 30 Protected $100 minimum Book entry credit of U.S. Semi-annual Exempt discount, or years Securities government premium (TIPS) Mortgage-backed securities Government Market sets National $5,000 Full faith and Monthly price at par, 30-year Mortgage ($25,000 Book entry credit of U.S. principal and No exemption discount, or maturity Association minimum) government interest premium (GNMA) Agencies Federal Market sets Home Loan $1,000 Implied price at par, One to 20 Mortgage (minimums Book entry backing of U.S. Semi-annual No exemption discount, or years Corporation vary) government premium (fhlmc) Federal Market sets National Implied $1,000 ($10,000 price at par, One to 20 Mortgage Book entry backing of U.S. Semi-annual No exemption minimum) discount, or years Association government premium (FNMA) Market sets Federal Home $5,000 Implied price at par, One to 20 Loan Bank ($10,000 Book entry backing of U.S. Semi-annual Exempt discount, or years (FHLB) minimum) government premium Page 4 of 4 U.S. government and federal agency securities, continued

Security Denomination Form Guarantee Purchased Interest Maturity State and paymnet range local taxes schedule Agencies Market sets Financing Implied Semi-annual the price Out to the Corporation $1,000 Book entry backing of U.S. Zeros at Exempt (zeros – year 2019 (FICO) government maturity discounted) Resolution Market sets Implied Semi-annual Funding the price Out to the $1,000 Book entry backing of U.S. Zeros at Exempt Corporation (zeros – year 2030 government maturity (REFCORP) discounted) Tennessee Market sets Implied Semi-annual Valley $1,000 the price One to 50 Book entry backing of U.S. Zeros at Exempt Authority minimum (zeros – years government maturity (TVA) discounted) Market sets Federal Farm $5,000 Implied price at par, Three months Credit Bank ($10,000 Book entry backing of U.S. Semi-annual Exempt discount, or to 20 years (FFCB) minimum) government premium

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