Agency & Mortgage-Backed Bonds — Q&A

Ginnie Mae (GNMA) — guarantees VA/FHA/USDA insured loans; directly backed by U.S. Government. Fannie Mae (FNMA) — purchases insured and conventional mortgages; indirect backing. Freddie Mac (FHLMC) — purchases conventional mortgages only; indirect backing.

Ginnie guarantees only government-insured loans to specific borrower groups and has direct U.S. Government backing. Fannie and Freddie handle significant non-insured conventional mortgages, have only indirect backing, and are publicly traded companies owned by stockholders.

Monthly payments of both principal and interest (mortgage pass-through). Retail investors typically access MBS through mutual funds.

When interest rates fall, homeowners refinance and pay off mortgages early — the MBS returns principal sooner than expected while paying a higher yield than currently available. Rates fall → prepayment.

When interest rates rise, homeowners keep existing mortgages longer — the MBS lasts longer than expected while paying a lower yield than the current market. Rates rise → extension.

$952.50. 8/32 = 0.25 → 95 + 0.25 = 95.25 → scoot → $952.50. ⚠️ Government quotes use 32nds and fractions are NOT reduced.

$1,036.25. 20/32 = 0.625 → 103 + 0.625 = 103.625 → scoot → $1,036.25.

Both are percentage-of-par quotes, but corporates use eighths (fractions may be reduced) while government debt uses 32nds (fractions are not reduced). Government quotes may use a dash, colon, or period as separator.

T-bills are quoted in discount yield form (e.g., 3.2%) — a yield percentage — not as a dollar price, because they are short-term zero-coupon instruments.

In the over-the-counter (OTC) markets — trades that do not occur on a physical exchange like the NYSE.