Government bonds are popular investments
because of their safety.
However, not all government bonds are the same.
In this video, we'll talk about two types--
Treasury and agency bonds.
You'll learn how they're similar,
and how they're different.
We'll also discuss some benefits and risks that come with bonds.
Let's start with treasuries.
The US Treasury was first established by Congress
in 1789.
The Treasury performs a number of duties, but in a nutshell,
the Treasury's job is to raise money for government expenses
and pay the nation's bills.
The Treasury typically raises money in one of two ways--
through taxes and by issuing bonds to investors.
In the investing world, bonds issued by the US Treasury
are typically referred to as Treasuries.
Treasuries are one of the most common fixed-income investments
and might play an important role in your own portfolio.
Let's start with the basics.
Treasuries are a loan investment,
which means investors loan money to the US government
for a set period of time in exchange
for a defined rate of return known as a yield.
The length of time of the loan investment
is known as the maturity.
Once an investor purchases a Treasury bond,
the investor receives regularly scheduled payments
until the bond matures.
At maturity, the government pays back
the full amount, or principal, that was originally invested.
Treasuries are classified into three types based
on their length of maturity.
Bills have a maturity of less than a year.
Notes have a maturity of 1 to 10 years.
And bonds have a maturity greater than 10 years.
Typically, the longer the maturity date,
the higher the yield.
Investors normally purchase Treasuries
because they're considered to be safe investments.
They have this reputation because a Treasury's interest
payments and return of investment principle
is guaranteed by the full faith and credit of the US
government.
In fact, Treasuries are considered
to be so safe that they're commonly referred
to as the risk-free investment.
But this isn't quite true.
No investment is without risk.
For example, some countries have had trouble
paying their bills at times.
This is called default risk.
There are additional risks investors should be aware of,
such as interest-rate risk.
This risk comes into play if you purchase a Treasury bond
and want your money back before maturity.
To do this, you'll need to sell the Treasury
at its current market price, which
means you may get less than what you invested in the bond.
This is especially likely if interest rates have gone up
since you purchased your bond.
On the other hand, if interest rates have decreased,
there is also a chance that you could
get more than you invested.
As we said before, government bonds aren't created equal.
In fact, there are some key differences between Treasury
bonds and agency bonds.
Agency bonds work the same as Treasuries,
but are issued by government agencies
like the Federal Home Loan Bank, Fannie Mae, Freddie Mac,
and Sallie Mae.
Despite being government-sponsored agencies,
they aren't guaranteed by the US Treasury.
Therefore, they aren't considered as safe
as Treasuries.
For example, during the 2008 mortgage crisis,
Fannie Mae and Freddie Mac fell into distress
and were expected to default.
However, the federal government stepped in
and guaranteed the principal and interest for the bonds.
Despite this bailout, agency bonds
have a higher default risk than Treasuries.
Agency bonds are also subject to the same risks as other bonds,
including interest-rate risk as we previously discussed.
Now that you know how Treasury and agency investments work
and some of their risks, let's discuss how they
can fit into your portfolio.
Bonds are considered a fixed-income investment.
Whether you're in the early stages of investing
or in retirement, fixed-income investments
are typically part of any well-balanced portfolio.
Treasuries and agencies can help you
fill in this portion of your portfolio.
Treasuries can be purchased either directly
from the Treasury or through a brokerage account.
You can also invest in Treasuries
by buying shares of a mutual fund or ETF
that invests in a more diversified group
of Treasuries.
Agency bonds are more commonly purchased through your broker
and can also be found in mutual funds and ETFs.
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