Agency bonds can be structured to meet a specific need of an investor, issuer or both.
For instance, in addition to the traditional coupon-paying agency bond, some organizations issue no-coupon discount notes—called "discos"—generally to help them meet short-term financing demands. This explains why disco maturities are usually quite short, ranging from a single day to a year. Discos resemble STRIPS in that they are zero-coupon securities that are issued at a discount to par. As with all bonds that trade at such a discount, if you sell the bond before it matures, you may lose money.
Another type of structured agency security is a step-up note, or "step-up." These securities are callable with a coupon rate that "steps up" over time according to a pre-set schedule. The goal of a step-up is to minimize the impact of interest rate risk. Provided the security is not called, the step-up will keep providing the bondholder with an increased coupon rate, cushioning the investor from interest rate risk. Step-ups are not problem-free, however, as they often offer limited call protection.
Yet another type of agency is a floating-rate security, or "floater." Floaters pay a coupon rate that changes according to an underlying benchmark, such as the six-month T-bill rate.
Keep in mind that such structured notes, and other esoteric products such as index floaters and range bonds, can be quite complicated and may be unsuitable for individual investors.
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