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Are government-backed agencies safe investments?

Should you invest in a government bond? See more investing pictures.
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Liesa Ownby needs a new ride. She is 19, balances college coursework with a part-time job and wants to borrow money to buy a used car. While Ownby feels like this is a feasible plan, local lenders see it differently. To them, Ownby isn't a safe investment. They worry that with her low pay and scant work history, she may default on her loan.

In a way, you face the same dilemma as an investor. When you buy stocks or bonds, you're actually loaning money. What guarantee do you have that you'll be paid back?

That's where government backing comes in. In many cases, when you invest in a government-supported agency, you receive a payback guarantee. It's known as "full faith and credit" and refers to a government's promise to take responsibility for another entity's debt, should it default. This promise allows a government-backed agency to use a government's credit rating, which helps lower borrowing costs and attracts investors [source: Investopedia].

In Leisa Ownby's case, it would be like asking her father to co-sign a car loan. In doing so, Mr. Ownby would guarantee his daughter's debt, should she fail to make the payments. And, the lender could base the loan on Mr. Ownby's credit score to secure a lower interest rate.

As an investor, you may be wondering where you can find a Mr. Ownby of your own, at least when it comes to government-backed agencies. In the U.S., a government-backed agency bond refers to an entity that is part of the federal government, such as the Government National Mortgage Association (Ginnie Mae). Strictly speaking, Ginnie Mae does not issue bonds but insures mortgage-backed securities from other lenders. When you invest in these types of bonds, the government guarantees repayment [source: Fidelity].

Federally chartered corporations are another investment option, but are not backed by the full faith and credit of the U.S. government. Instead, they are backed by shareholders and are subject to some credit risk. Nevertheless, they are considered very safe due to their nature and offer a return rate somewhat higher than Ginnie Mae's. These government-sponsored enterprises (GSEs) include the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal Agricultural Mortgage Corporation (Farmer Mac) [sources: Morningstar, SIFMA].

Not all government-backed agencies offer the same investment protections, though. The Tennessee Valley Authority (TVA), for example, issues bonds backed not by shareholders, but backed instead by the agency's other revenue-generating projects [source: Fidelity].