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Buying a bond from a government agency is like making a loan to Fannie Mae, Freddie Mac or the Tennessee Valley Authority. When you invest in any bond, the issuer pays you a set interest rate and agrees to pay back the loan on the maturity date. The maturity dates typically range from one to 40 years.
Even though most government agencies were at one point sponsored by the U.S. government, it's important to note that not all of these bonds are backed by the U.S. government. But they are still considered appropriate for individuals looking for income and may pay higher interest rates than similar U.S. Treasury bonds. Your financial advisor can help you figure out the details – if, when and where agency bonds might fit into your portfolio.
If you live in a state with its own state tax on top of federal tax, you should know that state taxability varies depending on the type of agency bonds you buy. Interest you receive on debt from the most well-known agencies (like Fannie Mae and Freddie Mac) is taxable on both the federal and state level; interest received from other agencies is taxable only on the federal level. Be sure to check what is applicable in your state.
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Before investing in bonds, you should understand the risks involved, including credit risk and market risk. Bond investments are also subject to interest rate risk such that when interest rates rise, the prices of bonds can decrease, and the investor can lose principal value if the investment is sold prior to maturity.
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