HomeMy WebLinkAboutRes 2019-09-629 2019 Investment Policy ReviewCITY OF ANNA, TEXAS
RESOLUTION NO. Q00 -()r1 '& aq
(244-94nvestmentPolicy Review)
2(119
A RESOLUTION REVIEWING AND AMENDING THE INVESTMENT POLICY OF THE
CITY OF ANNA.
WHEREAS, the City of Anna, Texas ("the City") is committed to principles and
practices of open and fair government that honor the public trust; and
WHEREAS, the City of Anna, Texas City Council ("City Council") has determined that
it is in the interests of the citizens of Anna to adopt an Investment Policy that
establishes policies and procedures to govern the management and care of public
funds; and
WHEREAS, The Public Funds Investment Act ("the Act") requires annual review of the
City's Investment Policy; and
WHEREAS, The most recent annual review of the City's Investment Policy has
prompted an amendment to the existing policy attached hereto as Exhibit 1;
NOW THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF
ANNA, TEXAS, THAT:
Section 1. Recitals Incorporated.
The above -referenced recitals are incorporated herein as if set forth in full for all
purposes.
Section 2. Investment Policy Reviewed
The City Council has reviewed the City's investment policy and investment strategies
and approves the amended Investment Policy attached hereto as Exhibit 1.
PASSED by the City Council of the City of Anna, Texas, on this the 24th day of
September, 2019.
ATTEST: APPROVED:
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Carrie L. Smith, City Secretary= Nait(o Pike, Mayor
City of Anna, Texas
Investment Policy
THE CITY OF
September 24, 2019
TABLE OF CONTENTS
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I. Policy..................................................................................................1
II. Scope..................................................................................................1
III. Investment Objective and Strategy......................................................... 2
A. Preservation and Safety of Principal .............................................. 2
B. Liquidity..................................................................................... 2
C. Public Trust.................................................................................2
D. Yield...........................................................................................3
E. Strategy......................................................................................3
IV. Standards of Care.................................................................................4
A. Prudence....................................................................................4
B. Ethics and Conflict of Interest........................................................4
C. Delegation of Authority.................................................................5
D. Internal Control............................................................................5
V. Authorized Investments and Parameters..................................................6
A. Authorized Investments................................................................6
B. Prohibited Investments.................................................................7
C. Diversification.............................................................................7
D. Maximum Maturity........................................................................8
VI. Selection of Banks and Dealers.............................................................. 8
A. Depository..................................................................................8
B. Authorized Brokers/Dealers.......................................................... 9
C. Competitive Bid...........................................................................9
D. Delivery vs. Payment.................................................................... 9
VII. Custodial Credit Risk Management......................................................... 9
A. Safekeeping and Custody............................................................. 9
B. Collateralization..........................................................................10
VIII. Reporting............................................................................................11
IX. Investment Policy and Adoption............................................................11
X. Financial Glossary...............................................................................11
INVESTMENT POLICY
I. POLICY
It is the policy of the City of Anna (the "City") to administer and invest its funds in a manner
that will preserve the principal, maintain liquidity, and optimize earnings while meeting the
daily cash flow requirements of the City. The City will conform to all federal, state, and
local statutes, rules, and regulations governing the investment of the City and the
guidelines to be followed in achieving its objectives.
The City's policy is to hold investments to maturity; however, securities may be sold in
order to minimize the potential loss of principal and interest whose credit quality has
declined; or to meet unanticipated liquidity needs of the City.
The policy and strategy shall be reviewed by the Investment Committee and City Council
at least annually. Any modifications will be formally approved by the City Council. The
investment policy, as approved, is in compliance with the provisions of the Public Funds
Investment Act of the Texas Government Code Chapter 2256. The investment policy
addresses the methods, procedures and practices that must be exercised to ensure
effective and judicious fiscal management of the City's funds.
II. SCOPE
This policy applies to all financial assets and investment activities of all current funds of
the City of Anna, Texas and any new funds created in the future, unless specifically
exempt or excluded hereafter, will be administered in accordance with the objectives and
restrictions set forth in this Investment Policy. These funds are accounted for in the City's
Comprehensive Annual Financial Report and include: General Fund, Special Revenue
Funds, Grant Funds, Debt Service Funds, Capital Project Funds, Enterprise Funds, Trust
Funds, and the City's component units.
This policy does not apply to the assets administered for the benefit of the City by outside
agencies under deferred compensation programs, retirement programs, or defeased
bonds held in trust escrow accounts.
Except for cash in certain restricted and special funds, the City of Anna will combine cash
balances from all funds to maximize investment earnings. Investment income will be
allocated to the various funds based on their respective participation and in accordance
with generally accepted accounting principles. In addition, all the bond fund proceeds (to
include capital projects, debt service and reserve funds) will be managed by the governing
debt ordinance and the provisions of the Internal Revenue Code of 1986 applicable to the
issuance of tax-exempt obligations and the investment of debt proceeds.
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Ill. INVESTMENT OBJECTIVE AND STRATEGY
Objective - The primary objectives of the City of Anna's investment activities, listed in
priority order, shall be as follows:
A. Preservation and Safety of Principal
Preservation and safety of principal is the foremost objective of the City. Each
investment transaction shall seek first to ensure that capital losses are avoided,
whether they are from issuer defaults, erosion of market value, or other risks. The
objectives will be to mitigate credit and interest rate risk.
i. Credit Risk and Concentration of Credit Risk — The City will minimize credit
risk, which is the risk of loss due to the failure of the security issuer or
backer, and concentration of credit risk, the risk of loss attributed to the
magnitude of investment in a single issuer, by:
• Limiting investments to the types listed in safest types of investments
• Pre -qualifying the financial institutions, broker/dealers,
intermediaries, and advisers with which the City will do business, and
• Diversifying the investment portfolio so that potential losses on
individual securities will be minimized.
ii. Interest Rate Risk — The City will minimize interest rate risk, which is the
risk that the market value of securities in the portfolio will fall due to
changes in market interest rates, by:
• Limiting investments to the safest types of investments
• Limiting maximum weighted average maturity of the investment
portfolio to 365 days
• Structure the investment portfolio so that investments mature to meet
cash requirements for ongoing operations, thereby avoiding the need
to liquidate investments prior to maturity
• Diversify maturities and staggering purchase dates to minimize the
impact of market movements over time
B. Liquidity
The City's investment portfolio will remain sufficiently liquid to enable the City to
meet all operating requirements that can be reasonably anticipated. This is
accomplished by structuring the portfolio so that securities mature concurrent with
cash needs to meet anticipated demands. Furthermore, since all possible cash
demand cannot be anticipated, a portion of the portfolio will be invested in money
market funds that seek a stable $1.00 NAV or local government investment pools
that offer same-day liquidity for short-term needs.
C. Public Trust
All employees involved in the City's investment program shall seek to act
responsibly as custodians of the public trust. Investment Officers shall at all times
be cognizant of the standard of care and investment objectives and shall avoid any
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transaction that might impair public confidence in the City's ability to govern
effectively.
D. Yield
The investment portfolio of the City shall be designed to attain a market rate of
return throughout budgetary and economic cycles taking into account risk
constraints and liquidity needs. Return on investment, while important, is of less
importance than safety and liquidity. The investment portfolio shall be designed
with the objective of regularly exceeding the average rate of return on a six-month
U.S. Treasury Bill.
Funds held for future capital projects will be invested in securities that can be
reasonably be expected to produce enough income to offset inflationary costs
increases. However, such funds will never be unduly exposed to market price risks
that will jeopardize that assets availablity to accomplish their stated goal or be
invested in a matter inconsistent with applicable federal and state regulations.
Yields on debt proceeds that are not exempt from federal arbitrage regulations are
limited to the arbitrage yield of the debt obligation. Investment officials will seek to
preserve principal and maximize the yield of these funds in the same manner as
all other City funds. However, it is understood that if the yield achieved by the City
is higher than the arbitrage yield, positive arbitrage income will be averaged over
a five-year period and netted against any negative arbitrage income and the
positive arbitrage amount shall be rebated to the federal government as required
by current regulations.
E. Strategy — The City maintains pooled investments which are an aggregation of the
majority of City funds including tax receipts, enterprise funds, fine and fee
revenues, special revenues, grants, and non -bond capital project funds. This
portfolio is maintained to meet anticipated daily cash needs for City operations and
capital projects. The objectives of this portfolio are to ensure safety of principal;
ensure adequate investment liquidity; limit market and credit risk through
diversification; and attain a market rate of return in accordance with the objectives
and restrictions set for in this Policy. All investments will be of high quality with no
perceived default risk.
1. Operating Funds: Operating Funds generally have greater cash flow needs
than other types of funds and are therefore require the greatest short-term
liquidity of the Fund types. Investment strategies for operating funds and
commingled pools containing funds have as their primary objective to assure
that anticipated cash flows are matched with adequate investment liquidity.
The secondary objective is to create a portfolio structure which will experience
minimal volatility during economic cycles. They may be accomplished by
purchasing quality, short to medium term securities which will complement
each other in a laddered structure. Of utmost importance is the preservation
and safety of the investment principal.
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2. Debt Service Funds: Investment strategies for Debt Service Funds shall have
as the primary objective the assurance of investment liquidity adequate to cover
the debt service obligation on the required payment date. Securities purchased
shall not have a stated final maturity date which exceeds the debt service
payment date. Surplus funds outside the debt service dates will be invested
according to the investment guidelines for operating funds.
3. Capital Project Funds and Special Purpose Funds — The investment
objective of capital project funds is to schedule maturities to maximize
investment earnings while preserving principle. Funds for capital projects or
special purposes should allow for flexibility and unanticipated project outlays
by having a portion of their investments in highly liquid securities. The key to
an effective strategy is to be ware of project needs and match maturities to the
period funds are needed. The stated final maturity dates of securities held
should not exceed the estimated project completion date.
IV. STANDARDS OF CARE
A. Prudence — The standard of prudence to be used by investment officers shall be
the "prudent person" rule. This rule states that "Investments shall be made with
judgement and care, under circumstances then prevailing, which persons of
prudence, discretion and intelligence exercise in the management of their own
affairs, not for speculation, but for investment, considering the probable safety of
their capital as well as the probable income to be derived". The determination of
whether an investing officer has exercised prudence with respect to an investment
decision shall be applied in the context of managing an overall portfolio rather than
a consideration as to the prudence of a single transaction.
Investment officers acting in accordance with written procedures and this
investment policy an exercising due diligence shall be relieved of personal
responsibility for an individual security's credit risk or market price changes,
provided deviations from expectations are reported in a timely fashion and
appropriate action is taken to control unfavorable developments.
B. Ethics and Conflict of Interest - Each Investment Officer shall act as custodian
of the public trust avoiding any transaction which might involve a conflict of interest,
the appearance of a conflict of interest, or any activity which might otherwise
discourage public confidence. An Investment Officer shall refrain from personal
business activity that could conflict with proper execution of the investment
program, or which could impair his/her ability to make impartial investment
decisions.
They shall further disclose any personal financial/investment positions that could
be related to the performance of the investment portfolio and shall refrain from
undertaking personal investment transactions with any individual with whom
business is conducted on behalf of the City of Anna. Additionally, an Investment
Officer shall file with the Texas Ethics Commission and the City Council a
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statement disclosing any material interest they hold in financial institutions with
which they conduct business with on behalf of the City or any relationship with an
entity seeking to sell investments to the City or any relationship with the second
degree by affinity or consanguinity to an individual seeking to sell investments to
the City as determined under Chapter 573 of the Texas Government Code.
C. Delegation of Authority —
Investment Officers and Training - The Assistant to the City Manager,
Finance Director, and Accounting Manger shall be the Investment Officers.
The Investment Officers shall oversee and approve any deposit, withdrawal,
investment, transfer, documentation, and otherwise manage City funds
according to this Policy. No person may engage in an investment
transaction or the management of funds except as provided under the terms
of the Investment Policy, the Statement of Investment Strategy, and other
operational procedures established by the Finance Director.
As stipulated in the PFIA Chapter 2256.008, in order to ensure qualified and
capable investment management, within twelve (12) months after taking
office or assuming duties, each Investment Officer shall attend training
relating to his/her investment responsibilities and accumulate not less than
ten (10) hours of instruction. On an ongoing basis, all Investment Officers
shall receive not less than eight (8) hours of instruction in each subsequent
two-year period that begins on the first day of the City's fiscal year and
consists of the two consecutive fiscal years after that date. Training will be
conducted by an independent source approved by the Investment
Committee and must include education in investment controls, security
risks, strategy risks, market risks and compliance with the Public Funds
Investment Act.
Investment Committee - The Committee shall monitor the investment
activities; assist in the development of investment policies, strategies and
procedures; and annually review and approve the City's broker/dealers and
independent training sources.
4. Internal Control - The Finance Director will establish and maintain a system
of internal controls to ensure that the assets are protected from loss, theft, or
misuse. The internal control structure shall be designed to provide reasonable
assurance that these objectives are met. The concept of reasonable assurance
recognizes that the cost of a control should not exceed the benefits likely to be
derived and the valuation of costs and benefits requires estimates and
judgement by management.
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Accordingly, the Finance Director shall establish a process for an independent
review by an external officer to assure compliance with policies and procedures.
This annual compliance is required by the "Public Funds Investment Act" (PFIA)
[Section 2256.005m]. Controls deemed most important would include, but not
limited to:
• Control of collusion
• Separation of duties
• Separating transaction authority from accounting and record-keeping
• Custodial safekeeping
• Avoidance of physical delivery securities
• Clear delegation of authority
• Documentation of transactions
• Dual authorization of fed wire transfers
• Compliance with investment policies
• Accurate and timely investment reports
• Documentation of investment bidding
V. AUTHORIZED INVESTMENTS AND PARAMATERS
A. Authorized Investments
Funds of the City may be invested in the following instruments described below
consistent with Chapter 2256 of the State of Texas Government Code, known as
the "Public Funds Investment Act" (PFIA) and as authorized by this policy.
Investments not specifically listed below will not be permitted by policy.
1. Obligations of the United States government or its agencies and
instrumentalities, including the Federal Home Loan Banks.
2. Other obligations, the principal and interest of which are unconditionally
guaranteed or insured by, or backed by the full faith and credit of, this State or
the United States or their respective agencies and instrumentalities, including
obligations that are fully guaranteed or insured by the Federal Deposit
Insurance Corporation or by the explicit full faith and credit of the United States.
3. Direct obligations of this State or its agencies and instrumentalities.
4. Obligations of states, agencies, counties, cities, and other political subdivisions
of any state rated as to investment quality by at least one nationally recognized
rating firm not less than A or its equivalent.
5. Certificates of Deposit, and other forms of deposit, issued in compliance with
the PFIA, and insured by the FDIC, or when applicable, collateralized in
accordance with this Policy and the Public Funds Collateral Act that are issued
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by a depository institution that has its main office or a branch office in the state
of Texas.
6. Repurchase agreements placed and secured in compliance with the PFIA and,
collateralized with a minimum market value of 102 % of the dollar value of the
transaction plus accumulated accrued interest.
7. SEC -registered, AAAm, or its equivalent, (as rated by Fitch, Moody's or
Standard & Poor's), no-load money market mutual funds. The investment
objective of the fund must be to maintain a stable dollar net asset value of
$1.0000. The City may not invest funds under its control in an amount that
exceeds 10% of total assets of any individual money market mutual fund. A
fund prospectus shall be reviewed for compliance with this Policy prior to
depositing monies.
8. Interest bearing checking accounts that are fully collateralized at 102% of the
ledger balance less the amount insured by the Federal Deposit Insurance
Corporation (FDIC) or the National Credit Union Share Insurance Fund or their
respective successors.
B. Prohibited Investments
The Investment Officers shall not knowingly permit City funds to be invested with
any of the following investment instruments that are strictly prohibited:
1. Options trading or futures contracts
2. Hedging or purchasing any security that is not authorized by Texas State law
3. Any investment in asset backed or mortgage-backed securities
4. Any other restricted instruments or limitations that involve outright speculation.
C. Diversification
In order to minimize risk of loss due to interest rate fluctuations, investment maturities
will not exceed the anticipated cash flow requirements of the funds. When appropriate
and applicable, diversification by investment type shall be maintained by ensuring an
active and efficient secondary market in portfolio investments, and by controlling the
market and opportunity risks associated with specific investment types. Undue
concentrations of assets in a specific maturity sector shall be avoided. Bond proceeds
may be invested to comply with Federal arbitrage restrictions or to facilitate arbitrage
record-keeping and calculation.
In establishing specific diversification strategies, the following general policies and
constraints shall apply:
1. Portfolio maturities and potential call dates shall be staggered in a way that
protects interest income from volatility of interest rates and avoids undue
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concentration of securities from a specific maturity or callable sector. Securities
shall be selected which provide for stability of income and reasonable liquidity.
2. Continuously investing a portion of the portfolio in readily available funds such as
government investment pools, money market funds or overnight repurchase
agreements to ensure that appropriate liquidity is maintained in order to meet
ongoing obligations.
The Investment Officers shall conduct a quarterly review of these diversification
guidelines and shall evaluate the probability of market and default risk in various
instrument sectors as part of its consideration.
D. Maximum Maturity
To the extent possible, the City shall attempt to match its investments with
anticipated cash flow requirements. Unless matched to a specific cash flow, the
City will not directly invest in securities more than three (3) years from the date of
purchase. The composite portfolio will have a weighted average maturity of 365
days or less. This dollar weighted average maturity will be calculated using the
stated maturity date(s) of each security.
VI. Selection of Banks and Dealers
A. Depository
At least once every five years, a qualified depository shall be selected through the
City's banking services procurement process, which shall include a formal request
for proposal and be consistent with state law. In selecting depositories, the service
cost, hours of operation, yield on deposits, credit worthiness, location of
depository, ability to meet service requirements and banking relationship of the
institutions shall be considered.
All depository balances shall be insured or collateralized in compliance with
applicable State law. The City reserves the right, in its sole discretion, to accept or
reject any form of insurance or collateralization pledged towards depository
deposits. Depositories will be required to sign a Depository Agreement with the
City. The Agreement shall address any concerns in relation to acceptable
collateral, levels of collateral, substitution and addition of collateral, and reporting
and monitoring of collateral. The collateralized deposit portion of the Agreement
shall define the City's rights to the collateral in case of default, bankruptcy, or
closing and shall establish a perfected security interest in compliance with Federal
and State regulations, including:
• The Agreement must be in writing;
• The Agreement has to be executed by the Depository and the City
contemporaneously with the acquisition of the asset;
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VII.
The Agreement must be approved by the Board of Directors or
Designated Committee of the Depository and a copy of the meeting
minutes must be delivered to the City; and
The Agreement must be part of the Depository's "official record"
continuously since its execution.
B. Authorized Brokers/Dealers
Brokers and dealers are approved by the Investment Committee. At least once
annually, the Committee will review and revise a list of qualified banks, brokers,
and dealers that are authorized to engage in investment transactions with the City.
Evaluation of security dealers and financial institutions are based upon (1)
Financial conditions, strength and capability to fulfill commitments; (2) overall
reputation with other dealers or investors (3) regulatory status of the dealer; (4)
background and expertise of the individual representatives. All brokers and
dealers must be on the approved list in order to transact business with the City.
All local government investment pools and discretionary investment management
firms must sign a certification acknowledging that the organization has received
and reviewed the City's Investment Policy, and that reasonable procedures and
controls have been implemented to preclude investment transactions that are not
authorized by the City's Policy.
C. Competitive Bid
It is the policy of the City to require competitive bidding for all individual security
purchases except for money market
investment pools, which are deemed to
other securities will be competitively bid
bids.
D. Delivery vs. Payment
mutual funds and local government
be made at prevailing market rates. All
with at least three competitive offers or
All investment transactions, except investment pools and mutual funds must be
settled on a delivery versus payment basis. That is, funds shall not be released or
paid until verification has been made that the collateral or security was received by
the Trustee or custodian.
CUSTODIAL CREDIT RISK MANAGEMENT
A. Safekeeping and Custody - Safekeeping and custody of securities and collateral
shall be in accordance with state law. The City shall contract with a bank or banks
for the safekeeping of securities either owned by the City as part of its investment
portfolio or held as collateral to secure financial institution deposits.
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Securities owned by the City shall be held in the City's account as evidenced by
safekeeping receipts of the institution holding the securities. Safekeeping
institutions shall be independent from the parties involved in the investment
transaction.
Collateral will be held by a third -party custodian designated by the City, the Federal
Reserve Bank, branch of the Federal Reserve Bank, or a Federal Home Loan Bank
and pledged to the City as evidenced by pledge receipts of the institution with
which the collateral is deposited. The original copy of the safekeeping receipt shall
be delivered to the City.
B. Collateralization — All time and demand deposits and repurchase (and reverse)
agreements shall be secured by pledged collateral with a market value equal to or
not less than 102% of the deposits plus accrued interest less an amount insured
by FDIC and evidenced by original safekeeping receipts. Evidence of the pledged
collateral shall be maintained by the Finance Director or designee and held by an
independent party with whom the City has a current custodial agreement with.
Any substitutions of collateral must meet the requirements of the Public Funds
Collateral Act, Public Funds Investment Act and this investment policy. Substitution
of collateral must be approved by at least one Investment Officer of the City.
Written notice must be provided to the bank or safekeeping agent prior to any
security release.
Collateral shall be reviewed on a monthly basis to ensure the market value of the
securities pledged equals or exceeds the related time and deposit accounts or
repurchase (and reverse) agreements.
The City of Anna shall accept only the following securities as collateral:
• FDIC Insurance coverage
• Direct obligations of the United States or other obligations of the United
States, the principal and interest of which are unconditionally guaranteed or
insured by, or backed by the full faith and credit of the United States
• Direct debt obligations of an agency or instrumentality of the United States
• Direct debt of states, agencies, counties, cities, and other political
subdivisions of any state rate as to investment quality by a nationally
recognized investment rating firm not less than A or its equivalent.
• Letter of credit issued to the City by the
• Other securities specifically authorized
this Investment Policy
Federal Home Loan Bank
by the Investment Committee and
The City expressly prohibits the acceptance of Interest -only (10) and Principal -only
(PO) Collateralized Mortgage Obligations (CMOs) as collateral for bank deposits
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or repurchase agreements. The City's Investment Officers reserve the right to
accept or reject any form of collateral or enhancement at their sole discretion.
Vill. Reporting
The Investment Officers shall prepare an investment report at least quarterly in
compliance with the PFIA. This report will be prepared in a manner that will allow the City
to ascertain whether investment activities during the reporting period have conformed to
this Policy. The report will be provided to the City Council. In conjunction with the annual
audit, the external auditor will perform a formal review of the quarterly reports with the
results reported to the City Council.
IV. Investment Policy Adoption
The investment policy shall be adopted by Resolution of the City Council. The City
Council shall review the investment policy not less than annually. The investment policy
strategies shall be reviewed at least annually by the Investment Committee.
V. Financial Glossary
Accretion of Discount: An accounting method for realizing the additional income earned
through the purchase of a discounted, or zero-coupon security where the difference
between the discounted purchase price and the par value is credited to an income
account, gradually increasing the book value until it reaches par at maturity. Also see
amortization.
Accrued Interest: The interest accumulated on a security from its issue date or since the
last payment of interest up to but not including the purchase date. The purchaser of the
security pays to the seller the market price plus accrued interest.
Agency: A category of investments that include Government Sponsored Enterprises
(GSEs) of Fannie Mae, Freddie Mac, the Federal Home Loan Bank (FHLB), and the
Federal Farm Credit Bank (FFCB). Federal agencies are generally considered to be
government securities, and all carry the highest possible senior debt rating from both
Moody's and S&P.
Amortization of Premium: Period straight-line decreases in the book or carrying value
of a security so that the premium paid for a bond above its face value or call prices is
completely eliminated.
Ask or Asking Price: The price at which securities are offered by the broker/dealer; the
price at which a governmental entity buys a security; also referred to as an "offer" or
"offering price".
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Asset -Backed Security (ABS): A broad term used to describe a security created by
pooling certain loans together, whereby principal and interest payments made on the
loans are used to pay the security holders.
Basis Points: The unit of measurement for yield equal to 1/100th of 1 percent; e.g., Y4 of
1 percent is equal to 25 basis points.
Benchmark: A comparative base for performance evaluation. A good benchmark should
be verifiable, easy to understand and appropriate to the portfolio to which it is being
compared. Typical benchmarks used in the public sector include the three-month, six-
month, and one-year T-bill averages over a similar measurement timeframe.
Bid: The price offered for securities by purchasers. (When selling securities, one asks for
a bid.)
Bond: A very broad term used to describe a debt obligation. A bond may have a fixed or
floating coupon rate; may be issued by the U.S. Treasury or an agency or a corporation;
and may be callable or non -callable.
Book Entry Securities: Stocks, bonds, other securities, and some certificates of deposit
that are purchased, sold, and held as electronic computer entries on the records of a
central holder. These securities are not available for purchase in physical form; buyers
get a receipt or confirmation as evidence of ownership.
Book Value: The original cost of the security as adjusted for amortization for any premium
paid or accretion of discount since the date of purchase.
Broker: A party who brings buyers and sellers together. Brokers do not take ownership
of the property being traded. They are compensated by commissions. They are not the
same as dealers; however, the same firms that act as brokers in some transactions may
act as dealers in other transactions.
"Bullet": Slang term for a type of bond that repays the entire principal amount on the
maturity date.
"Buy -and -Hold": A common investment strategy for conservative investors with specific
cash flow objectives or cyclical cash flow patterns, where by securities are purchased
with no intention to sell prior to maturity.
Callable Bond: A bond that the issuer has the right to redeem prior to maturity at a
specified price. Some callable bonds may be redeemed on one call date while others
have multiple call dates.
Certificate of Deposit (CD): A time deposit with a specific maturity evidenced by a
certificate.
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Capital Gain: The profitable result of the sale of a security or asset, whereby the principal
exceeds the book value of a security.
Capital Loss: The resulting loss when the principal amount on the sale of a security or
asset is less than the book value of a security.
Collateral: Securities, evidence of deposit or other property which a borrower pledges to
secure repayment of a loan. Also refers to securities pledged by a bank to secure deposits
of public monies.
Collateralized Mortgage Obligation (CMO): A type of mortgage-backed security
created by dividing the rights to receive the principal and interest cash flows from an
underlying pool of mortgages in separate classes or tiers.
Commercial Paper: Short-term unsecured promissory notes issued by corporations for
a maturity specified by the buyer. It is used primarily by corporations for short-term
financing needs at a rate which is generally lower than the prime rate.
Confirmation: The document used to state in writing the terms of the trade which had
previously been agreed to verbally.
Coupon Rate: The stated annual rate of interest payable on a coupon bond expressed
as a percentage of the bond's face value.
Constant Dollar Fund or Pool: A type of money market fund or investment pool whose
stated objective is to offer safety of principal and liquidity by maintaining a $1 dollar share
value for all its participants, meaning that the dollar value of the original deposit is
expected to be maintained through conservative management practices; also referred to
as a "dollar in/dollar out" fund or pool.
Credit Risk: The risk that (1) the issuer is downgraded to a lower quality category and/or
(2) the issue fails to make timely payments of principal and interest.
Cusip Number: A nine -digit number established by the Committee on Uniform Securities
Identification Procedures that is used to identify publicly traded securities. Each publicly
traded security receives a unique CUSIP number when the security is issued.
Custody: The service of an organization, usually a financial institution, of holding (and
reporting) a customer's securities for safekeeping. The financial institution is known as
the custodian.
Dealer: A firm which buys and sells for its own account. Dealers have ownership, even
if only for an instant, between a purchase from one party and a sale to another party.
They are compensated by the spread between the price they pay and the price they
receive. Dealers are not the same as brokers; however, the same firms which act as
dealers in some transactions may act as brokers in other transactions.
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Delivery Versus Payment (DVP): DVP requires that the delivery is made at the same
time payment for those securities is received in the account.
Depository Trust Company (DTC): An organization that holds physical certificates for
stocks and bonds and issues receipts to owners. Securities held by DTC are immobilized
so that they can be traded on a book entry basis.
Discount: The amount by which the price paid for a security is less than its face value.
Discount Securities: Securities that do not pay periodic interest. Investors earn the
difference between the discount issue price and the full -face value paid at maturity.
Diversification: Dividing the investment funds among a variety of securities offering
independent returns, to reduce risk inherent in particular securities.
Duration: A sophisticated measure of the weighted average maturity of a bond's cash
flow stream, where the present values of cash flows serve as the weights.
Face Value: The principal amount due and payable to a bondholder at maturity; par value.
Also, the amount on which coupon interest is computed.
Fair Value: The amount at which a financial instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale.
Federal Deposit Insurance Corporation (FDIC): A federal agency that insures bank
deposits.
Federal Farm Credit Banks (FFCB): A government-sponsored corporation what was
created in 1916 and is a nationwide system of banks and associations providing mortgage
loans, credit, and related services to farmers, rural homeowners, and agricultural and
rural cooperatives. The banks and associations are cooperatively owned, directly or
indirectly, by their respective borrowers. The Federal Farm Credit System is supervised
by the Farm Credit Administration, an independent agency of the U.S. government. (See
Government Sponsored Enterprises)
Federal Funds Rate: The rate of interest at which banks with excess reserves charge
banks lacking reserves for overnight loans to meet reserve requirements. This key
overnight rate determines, in large part, the rate at which overnight repurchase
agreements will trade. When the Federal Reserve "raises rates", the target fed funds rate
is increased and other short-term security yields follow. Since pools and money market
funds invest heavily in short-term securities, their rates often approximate the fed funds
rate at any given point in time.
Federal Home Loan Banks (FHLB): Government-sponsored wholesale banks (currently
twelve regional banks) which lend funds and provide correspondent banking services to
member commercial bank, thrift institutions, credit unions and insurance companies. The
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mission of the FHLBs is to liquefy the housing related assets of its members who must
purchase stock in their district Bank. (See Government Sponsored Enterprises)
Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac): A government-
sponsored corporation that was created in July 1970, by the enactment of Title III of the
Emergency Home Finance Act of 1970. Freddie Mac was established to help maintain
the availability of mortgage credit for residential housing, primarily through developing
and maintaining an active, nationwide secondary market in conventional residential
mortgages. (See Government Sponsored Enterprises)
Federal National Mortgage Association (FNMA or Fannie Mae): FNMA, like GNMA
was chartered under the Federal National Association Act in 1938. FNMA is a federal
corporation working under the auspices of the Department of Housing and Urban
Development (HUD). It is the largest single provider of residential mortgage funds in the
United States. Fannie Mae is a private stockholder -owned corporation. FNMA securities
are highly liquid and are widely accepted. FNMA assumes and guarantees that all
security holders will receive timely payment of principal and interest. (See Government
Sponsored Enterprises)
Federal Open Market Committee (FOMC): A group of Federal Reserve Officials that
meet eight times per year to set U.S. monetary policy (raise and lower interest rates).
The Committee must balance its two primary and often conflicting objectives of achieving
stable economic growth and keeping inflation at acceptable levels.
Federal Reserve System: The central bank of the United States created by Congress
and consisting of a seven -member Board of Governors in Washington, D.C., twelve
regional banks and about 5,700 commercial banks that are members of the system.
Government -Sponsored Enterprises (GSE's): Payment of principal and interest on
securities issues by these corporations is not guaranteed explicitly by the U.S.
government; however, must investors consider these securities to carry an implicit U.S.
government guarantee. The debt is fully guaranteed by the issuing corporations. GSE's
include: Farm Credit System, Federal Home Loan Bank System, Federal Home Loan
Mortgage System, Federal Home Loan Mortgage Corporation, and Federal National
Mortgage Association.
Interest Rate Risk: The risk that the general level of interest rates will change, causing
unexpected price appreciations or depreciations.
Ladder: A common investment strategy whereby securities are purchased to mature at
regular intervals so that cash is always available to meet known obligations or be
reinvested back into the market at prevailing rates.
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Liquidity: An entity's capacity to meet future monetary outflows (whether they are
required or optional) from available resources. Liquidity is often obtained from reductions
of cash or by converting assets into cash.
Liquidity Risk: The risk that an investment will be difficult to sell at a fair market price in
a timely fashion.
Market Risk: The risk that the value of a security will rise or decline as a result of changes
in market conditions. It is that part of a security's risk that is common to all securities of
the same general class (stocks and bonds) and thus cannot be eliminated by
diversification; also known as systematic risk.
Market Value: the price at which a security is trading and could presumably be purchased
or sold.
Master Repurchase Agreement: A written contract coverall all future transactions
between the parties to repurchase agreements that establishes each party's rights in the
transactions. A master agreement will often specify, among other things, the right of the
buyer to liquidate the underlying securities in the event of default by the seller.
Maturity Date: The date on which the principal or face value of an investment becomes
due and payable.
Mortgage -Backed Securities: Securities composed of, or collateralized by, loans that
are themselves collateralized by liens on real property.
Offer: The price asked by a seller of a security. (When purchasing securities, one asks
for an offer).
PAR: See Face Value
Pooled Fund Group: An internally created fund of an investing entity in which one or
more institutional accounts of the investing entity are invested.
Premium: The amount by which the price paid for a security exceeds its face value.
Primary Dealer: A group of government securities dealers that submit daily reports of
market activity and positions and monthly financial statements to the Federal Reserve
Bank of New York and are subject to its informal oversight. Primary dealers include
Securities and Exchange Commission (SEC), registered securities broker-dealers,
banks, and few unregulated firms.
Principal: The face or par value of an instrument, exclusive of accrued interest.
Prudent Person Rule: An investment standard. In some states the law requires that a
fiduciary, such as a trustee, may invest money only in a list of securities selected by the
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state. In other states the trustee may invest in a security if it is one which would be bought
by a prudent person of discretion and intelligence who is seeking a reasonable income
and preservation of capital.
Rate of Return: The amount of income received from an investment, expressed as a
percentage. A market rate of return is yield that an investor can expect to receive in the
current interest -rate environment utilizing a buy -and -hold to maturity investment strategy.
Reinvestment Rate: The interest rate earned on the reinvestment of coupon payments.
Reinvestment Rate Risk: The risk that the actual reinvestment rate falls short of the
expected or assumed reinvestment rate.
Repurchase Agreement (RP or REPO): A type of agreement in which an investor
exchanges cash for securities with a primary dealer or bank and earns a fixed rate of
interest for a specific period. At the end of the period, securities are returned for principal
along with accrued interest. Dealers and banks use repo proceeds to finance their
inventory positions.
Safekeeping: A procedure where securities are held by a third party acting as custodian
for a fee.
Secondary Market: A market made for the purchase and sale of outstanding issues
following initial distribution.
Securities and Exchange Commission (SEC): Agency created by Congress to protect
investors in securities transactions by administering securities legislation.
Settlement Date: The purchase (or sale) date of a security on which the money actually
changes hand.
Spread: Most commonly used when referring to the difference between the bid and asked
prices in a quote. Additionally, it may also refer to additional basis points that a non -
Treasury security earns over and above a Treasury with a comparable maturity date.
Treasury Bills: A non-interest-bearing discount security issued by the U.S. Treasury,
generally having initial maturities of 3 months, 6 months, or 1 year.
Treasury Bonds: Long-term, coupon bearing U.S. Treasury securities having initial
maturities of more than 10 years.
Treasury Notes: Intermediate-term, coupon bearing U.S. Treasury securities having
initial maturities of 2-10 years.
Unrealized Gain or Loss: The amount of profit (or loss) that would be reflected on the
sale of a security if that security were sold. The unrealized gain or loss is calculated by
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taking the difference between book value and market value of the security at any given
point in time.
Weighted Average Maturity (WAM): This common term, usually expressed in number
of days, represents a dollar -weighted average of the remaining term to maturity of all
assets in a pool or securities portfolio. A longer WAM generally indicates higher market
risk.
Yield: The return, expressed as a percentage, that a security will earn as a result of both
the coupon rate and any discount earned or premium paid. A yield will exceed the coupon
if purchased at a discount (and vice -versa).
Yield Curve: The relationship between yields and maturity dates for a set of similar
bonds, usually Treasuries, at a given point in time. A yield curve is a standard measure
of risk and return and answers the question "how much additional yield will I earn if I
extend my maturity and assume additional market risk?".
Yield -to -Maturity: The expected rate of return of a bond if it is held to its maturity date;
calculated by taking into account the current market price, stated redemption value,
coupon payments and time to maturity and assuming all coupons are reinvested at the
same rate; equivalent to the internal rate of return (IRR).
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