As these trends unfolded, GSEs became more agile in capitalizing on them. Through ongoing Medium Term Note or other debt programs which allow issuers to come to market on a continuing basis with different debt offerings, GSEs gain the flexibility to structure the size and terms of their debt issues to meet the requirements of a particular investor or class of investors. Under these programs, issuers may choose a variety of maturities with either callable or fixed maturities as well as floating interest rates, interest rates linked to one or more market indices, different interest payment dates and other key features. The same flexibility may be achieved through individually negotiated security offerings. The variety of issued securities enable GSEs to lower their cost of funding by targeting an issue to a particular investor need, since investors are typically willing to pay a premium to obtain a desired cash flow or implement a particular market view.
Issuers also use the structures to obtain options from investors in a cost-effective manner.
For example, an investor will demand a yield premium for allowing the issuer the option to call a bond or note, but if interest rates decline the issuer might ultimately save money by exercising the call option. The third party may be an investment bank, a subsidiary of an investment bank, a swap dealer or another entity. Under these agreements, the issuer receives a cash flow needed to fulfill the terms of the security offering while agreeing to pay its counterparty a rate that might better match the incoming cash flow on its assets. All reproduction and other rights reserved. The printed version of this Guide is available in bulk from The Bond Market Association's Publications Department.