GNMA - Government National Mortgage Association
A "Ginnie Mae" is a pool of FHA and VA residential mortgages which must meet certain specifications to be acceptable. After GNMA gives its approval to the mortgage banker, the GNMA Mortgaged-backed certificate is issued.
GNMA securities offer the investor principal and interest that are guaranteed by the United States Government. GNMA Yields compare favorably to those of government securities or high grade corporate bonds.
The monthly cash flow from a Ginnie Mae security can be reinvested to create a higher effective yield than would be available from a comparable security with the same coupon price.
GNMA securities are subject to "pre-payment risk". This means that if interest rates decline mortgages may be prepaid early shortening the average life of the GNMA security in a manner similar to a bond being called away from an investor. The security holder is then forced to reinvest the principal at a lower interest rate. GNMA securities are also subject to "extension risk". If interest rates rise those holding GNMA securities will be forced to keep them for longer than anticipated at a lower yield than would be available in the open market.
The minimum size of a newly issued GNMA is $25,000 with increments of $5,000 over that amount. A large, active secondary market provides ready liquidity as well as the opportunity to buy certificates with remaining cash balances of less than $25,000. Another way to purchase a Ginnie Mae is through a Unit Trust which allows investors to purchase the security in units as small as $1,000.
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