OUR BUSINESS

Strategy

Investment Strategy

Our principal goal is to preserve our book value while generating net income for distribution to our stockholders through regular quarterly dividends from our net interest income, which is the spread between the interest income earned on our interest earning assets and the interest costs of our borrowings and hedging activities.

Our investment strategy is designed to:

• Build an investment portfolio consisting of agency securities that seeks to generate attractive risk-adjusted returns
• Capitalize on discrepancies in the relative valuations in the agency securities market
• Manage financing, interest and prepayment rate risks
• Provide regular quarterly distributions to our stockholders
• Qualify as a REIT
• Remain exempt from the requirements of the Investment Company Act of 1940, as amended ("Investment Company Act")

We employ the expertise of AGNC's experienced investment team to build an investment portfolio consisting of agency securities that incorporates our understanding and outlook of the RMBS market. We seek to capitalize on changes in the prepayment and interest rate environment both currently, due to disruptions throughout the mortgage market, and going forward as future trends emerge.

Our investment philosophy is based on, what we feel are, the fundamentals of MBS investing: Asset Selection, Risk Management and Funding/Leverage.

Our Targeted Investments

The agency securities in which we invest consist of residential pass-through certificates and collateralized mortgage obligations (CMOs), for which the principal and interest payments are guaranteed by a U.S. Government agency or U.S. Government-sponsored entity.

• Residential Pass-Through Certificates. Residential pass-through certificates are securities representing interests in “pools” of mortgage loans secured by residential real property where payments of both interest and principal, plus pre-paid principal, on the securities are made monthly to holders of the securities, in effect “passing through” monthly payments made by the individual borrowers on the mortgage loans that underlie the securities, net of fees paid to the issuer/guarantor and servicers of the securities. Holders of the securities also receive guarantor advances of principal and interest for delinquent loans in the mortgage pools.

• Collateralized Mortgage Obligations. CMOs are structured instruments representing interests in residential pass-through certificates. CMOs consist of multiple classes of securities, with each class having specified characteristics, including stated maturity dates, weighted average lives and rules governing principal and interest distribution. Monthly payments of interest and principal, including prepayments, are typically returned to different classes based on rules described in the trust documents. Principal and interest payments may also be divided between holders of different securities in the CMO and some securities may only receive interest payments while others receive only principal payments.

These securities are collateralized by pools of fixed−rate mortgage loans (FRMs), adjustable−rate mortgage loans (ARMs) or hybrid ARMs. Hybrid ARMs are mortgage loans that have interest rates that are fixed for an initial period (typically three, five, seven or 10 years) and, thereafter, reset at regular intervals subject to interest rate caps. Our allocation of investments among securities collateralized by FRMs, ARMs or hybrid ARMs will depend on our assessment of the relative value of the securities, which will be based on numerous factors including, but not limited to, expected future prepayment trends, supply and demand, costs of financing, costs of hedging, expected future interest rate volatility and the overall shape of the U.S. Treasury and interest rate swap yield curves.

The agency securities that we acquire provide funds for mortgage loans made to residential homeowners. These securities generally represent interests in pools of mortgage loans made by savings and loan institutions, mortgage bankers, commercial banks and other mortgage lenders. These pools of mortgage loans are assembled for sale to investors, such as us, by various government-related or private organizations.

Agency securities differ from other forms of traditional debt securities, which normally provide for periodic payments of interest in fixed amounts with principal payments at maturity or on specified call dates. Instead, agency securities provide for a monthly payment, which may consist of both interest and principal. In effect, these payments are a “pass-through” of the monthly interest and scheduled and unscheduled principal payments (referred to as “prepayments”) made by the individual borrower on the mortgage loans, net of any fees paid to the issuer, servicer or guarantor of the securities.

Financing Strategy

As part of our investment strategy, we borrow against our investment portfolio using repurchase agreements. Our borrowings generally have maturities that range from 30 to 90 days, but may have maturities up to 364 days. We expect our leverage will range between five to 10 times the amount of our stockholder's equity (calculated in accordance with GAAP).

Hedging Strategy

As part of our risk management strategy, we hedge our exposure to interest rate and prepayment risk given our investment strategy, the cost of the hedging transactions and our intention to qualify as a REIT. We design an interest rate risk management program consistent with our outlook for the market to minimize the impact of changes in interest rates on our investment portfolio and related borrowings. We may enter into interest rate caps, collars, floors, forward contracts, options, futures or swap agreements to attempt to mitigate the risk of the cost of our variable rate liabilities increasing at a faster rate than the earnings on our assets during a period of rising interest rates.