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Bonds 109: US Government Agency Bonds

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1.
When many mortgages in an investment pool are prepaid, the investor may face the problem of _______.
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Reinvesting the money in another security that provides a lower interest rate. When a number of mortgages in the pool are prepaid, the investor receives payments of interest and principal sooner than planned. This can be a problem if the government agency bond matures at a time when interest rates on similar investments are low.
2.
Fannie Mae and Freddie Mac are former US government agencies that are now privately held companies.
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False. Fannie Mae and Freddie Mac are former US government agencies that are now publicly listed companies.
3.
The extension risk increases the amount of money the investor has to buy other securities at a time of high interest rates.
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False. The extension risk reduces the amount of money the investor has to buy other securities at a time of high interest rates, as the investor's bond pays more slowly when payment of the home mortgages in the pool is extended longer than planned.
4.
The minimum initial investment in a Ginnie Mae bond is _______.
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$25,000. The minimum investment for a Ginnie Mae is generally $25,000, although you sometimes can buy them for less than $25,000 on the secondary market, as well as through shares in mutual funds or investment trusts that invest in Ginnie Maes.
5.
One advantage of government agency bonds is _______.
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Higher return potential than that of Treasury securities. Agency bonds generally offer higher returns than Treasury securities do, along with higher volatility as the market for these securities responds to changes in mortgage rates.