Question

Would you choose a bond issued by an agency of the U.S. government or a government sponsored enterprises (GSEs). Why?

Answer 1

For understanding which bond to choose, let us first understand the basic difference between an agency of the US government and a GSE.

The agency of the US government is itself the US government whereas the GSE is a quasi-governmental, i.e. it acts as the government but they are entities made by the government to regulate the liquidity and credit in certain sectors of the economy.

Therefore, any bond issued by any agency of the US government is completely backed by the US federal government.. Thus, you will always get your due payments in time and in full. Examples include T-bills and Ginnie Mae.

Whereas, bonds issued by the GSE are also safe, but carries an extra credit risk, because it is not completely backed by the US federal government. Thus, you will have some worry if there is a default in the mortgage payments because that may affect your income of interest and principals. Examples include Fredie Mac and Fannie Mae.

Therefore, if you want to choose between what to opt for, if you want complete risk free investment then go for, bonds issued by the agencies of US.

If you want to bear some extra risk and earn that extra return, you can go for the bonds issued by the GSEs.