GNMA has the largest amount of debt outstanding (approximately $40 billion) of any federal agency. In this vehicle, pools of government guaranteed or insured mortgages are packed together and sold to the public.
These securities are similar to home mortgages where people make monthly payment of principal and interest on their mortgages. In the same way, these government backed pools of mortgages receive monthly payments of principal and interest from individuals. This principal and interest is "passed-through" monthly to the owners of the GNMA securities.
GNMA's come in registered form only in amounts of $25,000 and up, in multiples of $5,000. Principal and interest are paid monthly; the payments are guaranteed by GNMA, backed by the full faith and credit of the U.S. With the declining principal, the average life of this security is estimated to be 12 years. Further, the return (yield) at this writing is over 8 per cent and offers the investor as much as 0.5 per cent more yield than similar 10-and 15-year U.S. Treasuries. The income is subject to federal and state income taxes. Preferred Stock
Unlike corporate bonds which signify a creditor's position in a corporation, preferred stock signifies ownership and certain preferences on earnings and assets over a common stockholder. The main reason preferreds are included here, is that they pay a fixed or stated dividend and are available to individuals. Common stock may have its dividends raised, lowered or omitted, depending on earnings. Bonds have first call on earnings as creditors. Preferred are next in line; the residual income goes to common holders.
Public utilities issue a steady stream of preferreds, and industrial companies are occasional visitors to the market.
The annual dividend can be stated in a dollar amount of the par value of the stock ($8 per $100 share), or as a percentage of the par value (4 per cent for each $50 per value, which equals an 8 per cent return). Most preferreds have no maturity date, but during recent periods of high interest rates, many preferreds were and are issued with call features and sinking funds that gives them a limited life.
The return on new issues have historically paralled similarly rated long corporate bonds. Consequently, an individual, in times of high interest rates, has the opportunity to acquire taxable income of 7.5 to 9.5 per cent on corporate securities of quality rated companies where the shares are usually denominated in $25, $50 and $100 units.
For corporations, the income on a preferred is 85 per cent tax-free which affords a high after-tax return.
Moody's and Standard & Poor's rate preferreds as to their worthiness. Once again, the top four rating categories should be considered.
Preferreds are sold through negotiated and competitive underwriting syndicates made up of brokerage houses who can furnish ample information to the preferred buyer. Many preferreds are listed on the NYSE which makes them easy to follow. Bond Funds
There are available to the public as many different types of fixed income funds as there are available different types of individual fixed income investments. Basically, there are two different types of funds - "open-end" and "unit investment trusts."
Open-end funds grow as monies received by the funds are reinvested in more fixed income assets. Most funds are "no-load" funds; they charge no fees when shares are bought or redeemed (at net asset value). An initial investment of $2,500 is benerally required.
Unit investment trusts on the other hand, have a fixed number of units that are issued at a certain price, for example 20,000 units at a calculated price which includes a sales charge plus accrued interest. The sponsors make a market for the units or they may be tendered back to the trust.
The two types of instruments offer a variety of benefits such as monthly income (which can be distributed in cash or automatically reinvested); quality investments (generally the top four categories of Moody's and Standard & Poor's); diversification (carefully selected diverse portfolios); immediate liquidity (Shares or units can be readily sold); low initial investment needed ($2,500 in most open-end funds and $1,000 per trust units), and finally, convenience (a variety of other services are offfered; see various offering circulars for details). Taxable Funds
Various taxable funds are available. These run the game from high-yield income funds with portfoliosof lower-rated fixed income securities, to moderate yield income funds with a portfolio of higher quality issues, to shortterm market funds.
Short-term money market funds have as their major objective, the preservation of capital. Consequently, these portfolios are extremely short - a year or less depending on the interest rate outlook. They offer the investor a haven for short term funds, liquidity, professional management, and a current return.