HomeMy WebLinkAbout1997-09-02; City Council; 14336; ANNUAL REVIEW OF CITY INVESTMENT POLICY1 ' '*
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CITY OF CARLSBAD - AGENDA BILL
AB# 17,336
'ITY ATT'y: 6f - ANNUAL REVIEW OF CITY INVESTMENT POLICY MTG. 9/2/97
DEPT. HD: TITLE:
DEPT. TRS 1 cm MGR:a
I RECOMMENDED ACTION:
Adopt Resolution No. 4 3- 5 9 7 approving the City's investment policy, revisel
September 2, 1997.
ITEM EXPLANATION:
The effective management of the City's investment portfolio plays an important role in
maintaining Carlsbad's fiscal health. The portfolio is made up of funds received from
many sources having a variety of restrictions, designations, or special uses. Among otl
responsibilities, it is the City Treasurer's job to ensure that these funds will be available
when needed, and to manage this resource in a prudent way to provide a acceptable r:
of return on investment.
The Treasurer is guided in this process by the City's investment policy. This policy set:
out the City's plan for investment of funds based on acceptable levels of security, liquid
and yield.
Under section 53646(a) of the California Government Code the City Treasurer must
present an investment policy to the City Council on an annual basis for their review anc
approval. This annual review also gives the Treasurer an opportunity to recommend
revisions to the investment policy, or to improve the plan to take advantage of market
changes.
The Treasurer has assembled an investment review committee made up of the Assista
City Manager, Financial Management Director, City Attorney, an outside financial advis
and himself to review the status of investments and potential changes to the policy prio
recommending these changes to the City Council. This committee meets no less
frequently than once each quarter.
The principal changes recommended by the City Treasurer at this time pertain to
clarification of responsibilities and reporting of investment activity. These are summariz
below:
0 The annual adoption of the investment policy by the City Council serves to
delegate authority to the City Treasurer to manage and invest the inactive cash
under the terms of the policy. This explicitly identifies the act of delegation. Previously, it was implied. (Paragraph 5.0)
0 The unauthorized investments identified in Section 53601.6 of the California COI
pertain only to investments acquired after January 1, 1996. (Paragraph 10.0) This clarification was suggested by the City's auditors. There are no unauthoriz
investments in the portfolio.
I Section 53607 of the California Government Code requires that reports of
PAGE TWO OF AGENDA BILL (I)I 33b 8
investments include a listing of transactions for the reporting period. The City
Treasurer has included such a listing since the December 1996 report.
(Paragraph 18.0)
0 The annual consideration of the City’s investment policy must be done at a public
meeting. The requirement for a public meeting, although always met by the City
Council, was not explicit in the policy. (Paragraph 23.0)
EXHIBITS:
1. Resolution No. ctqc ’’ adopting a revised City investment policy.
2. City Investment Policy, Revised September 2, 1997.
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RESOLUTION NO. 97-597
RESOLUTION OF THE CITY COUNClL
OF THE CITY OF CARLSBAD, CALIFORNIA,
REVISING THE CITY'S INVESTMENT POLICY DATED SEPTEMBER 2,1997
WHEREAS, the City adopted an investment policy on January 2,
1985 as required by Section 53646 of the California Government Code; and
WHEREAS, Section 53646(a) of the California Government Code
requires the City Treasurer to render annually .to the City Council a statement 01
investment policy; and
WHEREAS, the City Council may from time to time revise this polic)
as may be necessary to provide proper guidance to City staff and the Cit)
Treasurer; and
WHEREAS, the City Treasurer has reviewed the existing investmen
policy and has recommended modifications which improve the City's ability tc
manage inactive funds; and
NOW, THEREFORE, BE IT RESOLVED by the City Council of thc
City of Carlsbad, California as follows:
1. The attached investment policy, revised September 2, 1997
(Exhibit 2) is hereby adopted and shall become effective immediately.
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2. That the Council finds that the investment policy, revised
September 2, 1997, (Exhibit 2) is in conformance with Sections 53601 and
53635 of the Galifornia Government Code,
PASSED, APPROVED AND ADOPTED at a regular meeting of the
City Council on the &d- day of Septe&q 1997, by the following vote, to wit:
AYES: Council Members Lewis, Finnila, Nygaard, Kulchin
NOES: None
ABSENT: None
CLAUDE A. LEWIS, Mayor.
ATTEST:
ALETHA L. MU (SEAL)
0 e Exhib it
STATEMENT OF INVESTMENT POLICY
CITY OF CARLSBAD
Submitted by: Jim Stanton, City Treasurer
September 2,1997
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TABLE OF CONTENTS
Introduction ......................................................................................................... 1
Policy .................................................................................................................. 1
Scope .................................................................................................................. 1
Pooled Investments ................................................................................... 1
Investments Held Separately .................................................................... 1
Objectives ........................................................................................................... 2
Safety ........................................................................................................ 2
Liquidity ..................................................................................................... 2
Return on Investment ................................................................................ 2
.. Duties & Responsiblllties ..................................................................................... 2
Prudence ............................................................................................................. 3
Ethics and Conflicts of Interest .................................................................. : ........ 3
Authorized Investments ...................................................................................... 3
Collaterization ..................................................................................................... 4
Unauthorized Investment / Investment Activity ................................................... 5
Investment Strategy ............................................................................................ 5
Diversification ...................................................................................................... 5
Maximum Maturities ............................................................................................ 5
Selection of Financial Institutions and Brokers ................................................... 6
Purchase. Payment and Delivery ........................................................................ 7
Safekeeping and Custody ................................................................................... 7
Performance Standard for Pooled Investmenls .................................................. 7
Reporting ............................................................................................................. 7
Short Term Borrowing ......................................................................................... 8
Short Term Loan ....................................................................................... 8
Line of Credit .............................................................................................. 9
Exceptions .......................................................................................................... 8
Internal Control .................................................................................................... 9
Review ................................................................................................................ 9
Investment Policy Adoption ................................................................................. 9
Glossary ............................................................................................................ 11
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CITY OF CARLSBAD
STATEMENT OF INVESTMENT POLICY
Approved by City Council Skpkmbc: ?Q, ?-&X
1.0 Introduction. The purpose of this document is to identify various policies a
procedures that enhance opportunities for a prudent and systematic investment pol
and to organize and formalize investment-related activities. Related activities wh
comprise good cash management include accurate cash projections, the expeditic
collection of revenue, the control of disbursements, cost-effective banking relations, a
arranging for a short-term borrowing program which coordinates working cap
requirements and investment opportunities.
2.0 Policy. It is the policy of the City of Carlsbad to invest public funds not requi for immediate day-to-day operations in safe and liquid investments having
acceptable return while conforming to all state statutes and the City's lnvestm
Policy governing the investment of public funds.
3.0 Scope. It is intended that this policy cover the investment activities of
contingency reserves and inactive cash under the direct authority of the City.
3.1 Pooled Investments. Investments for the City and its component units
be made on a pooled basis, including the City of Carlsbad, the Housing authc
of the City of Carlsbad, the Parking Authority of the City of Carlsbad, the Cit
Carlsbad Public Improvement Corporation, the Carlsbad Redevelopment Age1
and the Carlsbad Municipal Water District. The City's Comprehensive Anr
Financial Report identifies the fund types involved as follows:
6 General Fund
Special Revenue Funds
Debt Service Funds
Capital Project Funds
Enterprise Funds
Internal Service Funds
Redevelopment Funds
0 Trust Funds
Miscellaneous Special Funds
Any new funds created by the City Council, unless specifically exemptc
3.2 Investments held separately. Investments of bond proceeds will be
separately when required by the bond indentures or when necessary to
arbitrage regulations, If allowed by the bond indentures, or if the arb?
regulations do not apply, investments of bond proceeds will be held as part (
pooled investments.
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4.8 Objectives. Section 53600.5 of the California Government Code outlines tl
primary objectives of a trustee investing public money. The primary objectives, in ord
of priority, of the City's investment activities shall be:
4.7 Safety. Safety of principal is the foremost objective of the investme
program. Investments of the City shall be undertaken in a manner that seek
ensure preservation of capital in the overall portfolio.
4.2 Liquidity. The City's investment portfolio will remain sufficiently liquid
enable the City to meet all operating requirements which might be reasona
anticipated.
4.3 Return on investment. Investment return becomes a consideration o
after the basic requirements of safety and liquidity have been met. The City st
attempt to obtain an acceptable return provided that the requirements of saf
and liquidity are first met.
The City Treasurer shall strive to maintain the level of investment of, all continger
reserves and inactive funds as close to 100% as possible. While the objectives
safety and liquidity must first be met, it is recognized that portfolio assets represer
potential source of significant revenues. It is to the benefit of the City that these as:
be managed to produce optimum revenues, consistent with state statutes and IC
ordinances.
5.0 Duties and Responsibilities. By the annual adoption of this policy,
the responsibility of the City Treasurer as directed by the City Council. Under
authority granted by the City Council, no person may engage in an investrr
transaction covered by the terms of this policy unless directed by the City Treasurer.
In the execution of this delegated authority, the City Treasurer may establish accol
with qualified financial institutions and brokerddealers for the purpose of effec
investment transactions in accordance with this policy. The criteria used to SE
qualified financial institutions and brokerddealers are identified in paragraph 14 of
policy.
The City Treasurer may designate in writing a Deputy City Treasurer, who in
absence of the City Treasurer, will assume the City Treasurer's duties
responsibilities. The City Treasurer shall bwqxms& retain full responsibility fc
transactions undertaken under the terms of this policy.
In the endeavor to have all inactive cash invested all the time, the City Finance Din
will assist the City Treasurer in the gathering of information to create cash
estimates.
management of inactive cash and the investment of funds identified in paragraph 3.
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0 0 . 6.0 Prudence. Section 53600.3 of the California Government Code identifies i
trustees those persons authorized to make investment decisions on behalf of a loc
agency. As a trustee, the standard of prudence to be used shall be the "prude investor" standard and shall be applied in the context of managing the overall portfol
Investments shall be made with judgment and care--under circumstances thl
prevailing-which persons of prudence, discretion, and intelligence exercise in t
management of their own affairs, not for speculation, but for investment, consideri
the probable safety of their capital as well as the probable income to be derived.
Investment officers acting in accordance with written procedures and the investmc
policy and exercising due diligence shall be relieved of personal responsibility for
individual security's credit risk changes or market price changes, provided deviatiol
from expectations are reported in a timely manner and appropriate action is taken
control adverse developments.
7.0 Ethics and conflicts of interest. All participants in the City's investment proa
shall seek to act responsibly as custodians of the public trust. Officers and employ€
involved in the investment process shall refrain from personal business activity t
could conflict with proper execution of the investment program, or which could imy
their ability to make impartial investment recommendations and decisions. lnvestm
officials and employees shall make all disclosures appropriate under the Fair Politi
Practices Commission whenever there is a question of personal financial or investm
positions that could represent potential conflicts of interest.
8.0 Authorized investments.
Practices Act and may seek the advice of the City Attorney' and the Fair Politi
8.1 Pooled investments. The City Treasurer may invest City funds in
following instruments as specified in the California Government Code, Secti
53601, and as further limited in this policy.
8.1.1 Obligations of the U.S. Government, its agencies
instrumentalities.
8.1.2 Bankers Acceptances that are eligible for purchase by the Fed
Reserve System. Purchases may not exceed 270 days maturit]
25% of the portfolio.
8.1.3 Time Certificates of Deposit. Deposits should not exceed one 1
maturity. Deposits will be collateralized as specified in paragraph
of this Investment Policy.
8.1.4 Negotiable Certificates of Deposit issued by nationally or s'
chartered bank. Purchases may not exceed 30% of the portfolio.
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8.1.5 Prime Commercial Paper of the highest numerical rating of Mood;
Investment Services, Inc. or Standard & Boors Corporation. Furthl
eligible paper is limited to issuing corporations that are organized a
of $500 million and having a "AA" or higher rating for other debt oft
issuer. Purchases may not exceed 180 days maturity or 15% of 1
portfolio, and may not represent more than 5% of the outstandi
paper of an issuing corporation.
operating within the United States and having total assets in exce
8.1.6 Repurchase Agreements with a maximum maturity of one weel
Repurchase Agreements will only be with primary dealers of 1
Federal Reserve Bank of New York, and who have long-term d
rated in the "/"' or "AA" categories of Moody's lnvestm
Services, Inc. or Standard and Poors Corporation. Investments
be collateralized as specified in paragraph 9.0 of this lnvestm
Policy and may not exceed 5% of the portfolio.
8.1.7 Medium-term Corporate Notes of a maximum-. of five years L
maturity issued by corporations organized. and operating within
United States and rated in the "AAA" or "AA" categories of Mooc
Investment Services, Inc. and Standard and Poors Corporatio
Purchases may not exceed 30% of the portfolio.
8.1.8 Money market funds (whose portfolio consists of one or more of
foregoing legal investments).
8.1.9 Sweep account for the investment of overnight funds when the fu
are swept into investments allowed by this policy.
8.1.10 Local Agency Investment Fund (LAIF) of the State of Californ
Investments will be made in accordance with the laws and regulati
governing those Funds.
8.2 Investments held separately. Investments of bond funds will be mad
conformance with the trust indenture for each issue. Such investments wil
held separately when required.
9.0 Collateralization. Investments in time certificates of deposit shall be fully ins1
up to $100,000 by the Federal Deposit Insurance Corporation or the Federal Savin!
Loan Insurance Corporation, as appropriate. Investments in time certificates of del
in excess of $100,000 shall be properly collateralized. Section 53652 of the Calif(
Government Code requires that the depository pledge securities with a market vali
at least 10% in excess of the City's deposit as collateral in government securities,
50% in excess of the deposit as collateral in mortgage pools. Section 53649 oi
California Government Code specifies that the City Treasurer is responsible for entc
into deposit contracts with each depository.
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Investments in repurchase agreements must also be collateralized. In order
anticipate market changes and provide a level sf security for all funds, ti
collateralization level will be 102% of market value of principal and accrued interest.
10.0 Unauthorized investmentdinvestment activities. Section 53601.6 of t
California Government Code disallows the following investments acquired after Janus
1, 1996: -; ?, ?9W, Ss&h+53W?.55
~ inverse floaters, range notes, or interest-ol
strips that are derived from a pool of mortgages. In addition, and more general
investments are further restricted as follows:
10.1 No investment will be made that has either (I) an embedded option
characteristic which could result in a loss of principal if the investment is held maturity, or (2) an embedded option or characteristk which could seriously li
accrual rates or which could result in zero accrual periods.
10.2 No investment will be made that could cause the portfolio to be leveraged.
11 .O Investment strategy.
11.1 Pooled Investments. % A buy and hold strate
will generally be followed; that is, investments once made will usually be held u
maturity. A buy and hold strategy will result in unrealized losses as market inter
rates rise. Unrealized losses, however, will dissipate as the maturity dates of
investments are approached or as market interest rates decline. A buy and t
strategy requires that the portfolio be kept sufficiently liquid to preclude
undesirable sale of investments prior to maturity. Occasionally, the City Treasr
may find it advantageous to sell an investment prior to maturity, but this shc
only be on an exception basis and only when it is clearly favorable to do so.
11.2 Investments Held Separately. Investments held separately for b
proceeds will follow the trust indenture for each issue.
12.0 Diversification. The portfolio will be diversified to avoid incurring unreason:
and avoidable risks regarding specific security types or individual financial institutio
In addition to the limitations on specific security types indicated in paragraph 8.0 of
investment Policy, and with the exception of U.S. TreasurylFederal agency securi
and authorized pools, no more than 5% of the City's portfolio will be placed with
single issuer.
13.0 Maximum maturities.
13.1 Pooled Investments. A policy of laddered maturities will be followec
pooled investments. The following maturity requirements will apply as of
month end of each reporting period.
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13.1.1 At least 50% of the portfolio will be invested in instruments maturi
within one year from the current date. Of the remaining portion, more than 25% of the entire portfolio may have a maturity date betwe
3 and 5 years from the current date. Investments having a matul
greater than 5 years will not be made except as provided in paragra
13.3 of this Investment Policy.
13.1.2 The average portfolio investment maturity shall be 3 years or less.
dollar-weighted average will be used in computing the average matu
of the portfolio.
13.1.3 Before an investment is made in securities that mature more thar
years from the current date, the City Treasurer and the Financ
Management Director will review the City's long term cash needs. B
must concur before such an investment is made. Investments beyon
years will not be greater than 10% of the portfolio, and. will be coun
in the percentage of the portfolio that may mature beyond 3 years.
investments will be made that mature beyond 10 years from the curl
date.
To further provide for liquidity, investments will be made only in readily market:
securities actively traded in the secondary market.
13.2 Investments Held Separately. Maturities for investments held separa
will conform with the trust indenture for each issue.
14.0 Selection of financial institutions and brokersldealers. Investments shall
purchased only through well established, financially sound institutions. The 1
Treasurer shall maintain a list of financial institutions and brokerldealers approved
investment. All financial institutions and brokerldealers who desire to become quali
bidders for investment transactions will be given a copy of the City's Investment Po,
and a return cover letter which must be signed indicating that the investment policy
been read and understood. Qualified financial institutions and brokeddealers r
supply the City Treasurer with the following:
14.1 Financial Institutions.
0 Current audited financial statements.
0 Depository contracts, as appropriate.
0 A copy of the latest FDIC call report or the latest FHLBB repori
0 Proof that commercial banks, savings banks, or savings and
appropriate.
associations are state or federally chartered.
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14.2 BrokerlDealers.
8 Current audited financial statements.
Proof that brokerage firms are members in good standing 01
national securities exchange.
Commercial banks, savings banks, and savings and loan associations must maintail
minimum net worth to asset ratio of 3% (total regulatory net worth divided by tc
assets), and must have had a positive net earnings for the last reporting period.
15.0 Purchase, Payment, and Delivery. A competitive bid process, when practic
will be used to place all investment transactions. When two or more investm
opportunities offer essentially the same maturity, liquidity, yield, and quality, priority
be given first to the financial institutions based in the City of Carlsbad, and seconc
other financial institutions in the State of California.
Purchases on margin will not be made. Payment for securities will be done o
Delivery Versus Payment (DVP) basis via the City's custodian. Delivery of securi
will be made to the City in accordance with the third party custodial agreement.
16.0 Safekeeping and custody. All security transactions, including collateral
repurchase agreements, entered into by the City shall be conducted on a delivery-
payment basis. All securities owned by the City will be held by a third-party custoc
designated by the City Treasurer and evidenced by a monthly statement from
custodian. All securities will be held in the nominee name of the custodian. Collat
,for time deposits in savings and loans will be heid by the Federal Home Loan Ban
an approved Agent of Depository. Collateral for time deposits in banks will be he1
the City's name in the bank's Trust Department or in the Federal Reserve Bank.
17.0 Performance standard for pooled investments. Laddered maturities and a
and hold strategy for pooled investments will cause the investment portfolio to atta
commensurate with the investment risk constraints and the cash flow needs. Sinc
least 50% of the portfolio must mature within 1 year, the rate of return will be I?
closely related to, but lag behind, changes in short-term market rates. The rat
return of the investment portfolio will be based on the maturity value of the investmf
A dollar-weighted average of yields to maturity will be used in calculating the ral
return of the entire portfolio.
market-average rate of return throughout budgetary and economic cyc
18.0 Reporting. Sections 53607 and 53646 of the California Government Cc
require reports of investments and transactions to the City Council, City Manager,
internal auditor (or the Finance Director in the absence of an internal auditor).
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* 18.1 Pooled investments. The investment report shall be submitted monthly
the City Treasurer within 30 days following the end of the month covered by t report. The monthly report shall include the following elements;
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Itemized listing of portfolio investments by type, date of maturity, yield
maturity, and issuer.
Par value, dollar amount invested, book value, and current market value
of the date of the report will be given for the total of all securitii
investments, and moneys held by the City and its component units. 1
source of the market values will be cited.
Credit ratings of corporate notes
Accrued income
Weighted average yield of the portfolio
Weighted average days to maturity of the portfolio from the date of
report Percent of portfolio maturing within one year
Percent of portfolio maturing between one and 3 years
Percent of portfolio maturing between 3 years and 5 years .
Percent that each type of investment represents in the portfolio
Investment transactions for the reporting period
Fund source of investments when available
Statement that the investment portfolio has the ability to meet the Ci
cash flow demands for the next six (6) months
Statement of compliance of the portfolio with the City's Investment Polic
When applicable, any material exceptions will be noted.
An annual report for pooled investments will also be made to the City Council folloM
the close of the fiscal year. Among other items, the annual report will include
analysis of the composition of the portfolio with regard to fund source; a reviev
trends regarding the size of the fund, portfolio yields, and cash income; and a staterr
regarding anticipated fund activity in the next fiscal year.
18.2 Investments held separately. Thz i+wMme& :zpe# A. report
investments held separately, including deferred compensation balances, shal~
made quarterly within 30 days following the end of the quarter and submittec
an exhibit in the City Treasurer's monthly report. The quarterly report shall con
the information required by Section 53646 when available.
19.0 Short-term borrowing. The City is permitted by law to borrow money to n
current short-term cash flow needs. These needs may arise either because projec
cash disbursements exceed projected cash receipts, or because the City's c
accounts may be temporarily overdrawn due to the efforts to invest 100% of inac
funds at all times. To provide for these contingencies the City Treasurer is author
to take the following actions:
19.1 Shorbterm loan. When there is a shorffall between projected (
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2 revenues and projected cash disbursements, the City Treasurer will secure a lo
in the amount that would equal the cash deficit plus projected cash disbursemel
for one month. Any such loan will be repaid within one year.
19.2 Line of credit. The City Treasurer may maintain a line of credit with 1
City's bank in an amount to cover sums temporarily overdrawn because of effc
to invest all inactive funds at all times.
20.0 Exceptions. Occasionally, exceptions to some of the requirements specified
this Investment Policy may occur for pooled investments because of events subsequl
to the purchase of investment instruments, e.g., the rating of a corporate note helc
the portfolio is downgraded below an "AA" rating, or total assets in the portfolio decl
causing the percentage invested in corporate notes to rise above 30%, or
unforeseen expenditure causes investments maturing within one year to fall below 51
of the portfolio.
State law is silent as to how exceptions should be corrected. Exceptions may
temporary or more lasting; they may be self-correcting or require specific action.
specific action is required, the City Treasurer should determine the course of action t
would correct exceptions to move the portfolio into compliance with State and (
requirements. Decisions to correct exceptions should not expose the assets of
portfolio to undue risk, and should not impair the meeting of financial obligations as tt
fall due. Any subsequent investments should not extend existing exception:
Exceptions, and the decisions to correct the exceptions, will be reviewed with
Investment Review Committee referred to in paragraph 22.0 below.
21.0 Internal control. This policy and the strategy for and conduct of the investm
of City funds will be reviewed by an Investment Review Committee as set forth be
and by the City's auditors in the conduct of their annual audit of the City.
22.0 Review. An Investment Review Committee is hereby established to cond
reviews of the City's investment portfolio, the strategy being utilized for the investm
of City funds, and the City's investment policy. This Committee will be composed of
City Treasurer (acting as the Chair), the City Attorney, the Assistant City Manager,
Financial Management Director, and the Deputy City Treasurer (when not one of
foregoing). Additionally, an outside financial advisor may be included as an advi
without a vote. The Committee will convene periodically as necessary or desirable
no less frequentlythan once each quarter.
23.0 Investment policy adoption. Section 53646(a) of the California Governm
Code requires the City Treasurer v
to the City Council and the Investment Review Committee a statement of investrr
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4 policy no less frequently than once each year. The City’s investment policy and a
modifications thereto shall be considered at a public meeting. Adoption shall be mal
by resoJution of the City Council,
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GLOSSARY
Arbitrage Regulation: law to control the use of profit making by purchasing
price difference.
Bankers Acceptances: investment vehicle created to facilitate international
commercial trade transactions. The bank accepts responsibility to repay a loan
to the holder of the investment vehicle created in a commercial transaction. The
credit worthiness of Bankers Acceptances are enhanced because they are
secured by the issuing bank, the goods themselves, and the importer. Bankers
Acceptances are sold on a discounted basis.
Bond Indenture: written agreement specifying the terms and conditions for
issuing bonds, stating the form of the bond being offered for sale, interest to be
paid, the maturity date, call provisions and protective covenants, if any, collateral
pledged, the repayment schedule, and other terms. It describes the legal
responsibility for ensuring that interest payments are made to registered
bondholders.
Buy and Hold Strategy: investments in which management has the positive
intent and ability to hold each issue until maturity.
Collateralization: to secure a debt in part or in full by pledge of collateral, asset
pledged as securitylo ensure payment or performance of an obligation.
Commercial Paper: short-term IOU, or unsecured money market obligation,
issued by prime rated commercial firms and financial companies, with maturities
from 2 days up to 270 days. A promissory note of the issuer used to finance
current obligations, and is a negotiable instrument.
Delivery Versus Payment! securities industry term indicating payment is due
securities on one market for immediate resale on another in order to profit from a
obligations of a bond issuer and the powers of the bond trustee, who has the
when the buyer has securities in hand or a book entry receipt.
Interest-Only Strips: mortgage backed instrument where investor receives only
the interest, no principal, from a pool of mortgages. Issues are highly interest
rate sensitive. Cash flows vary between interest periods. As well, the maturity
date may occur earlier than that stated if all loans within the pool are pre-paid.
High prepayments on underlying mortgages can return less to the holder that the
dollar amount invested.
Inverse Floater: mortgage backed bond, usually part of a collateralized
mortgage obligation (CMO) bearing an interest rate that moves in the opposite
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direction of an index, for example, the LIBOR rate. An inverse floater may have
a floor and a cap.
Laddered Portfolio: bond investment portfolio with securities in each maturity
range (e.g. monthly) over a specified period of time (e.g. five years).
Leverage: investing with borrowed money with the expectation that the interest
earned on the investment will exceed the interest paid on the borrowed money.
Local Agency Investment Fund (LAIF): a voluntary investment program
offering participating agencies the opportunity to participate in a major portfolio
which daily invests hundreds of millions of dollars, using the investment expertise
of the State Treasurer’s Ofice Investment staff at no additional cost to the
taxpayer. Investment in LAIF, considered a short term investment, is readily
available for cash withdrawal on a daily basis.
Negotiable Certificates of Deposit: large denomination ($1 00,000 or more)
interest bearing time deposits, paying the holder a fixed amount of interest at
maturity. Issues can be sold to a new owner before maturity.
Nominee Name: registered owner of a stock or bond if different from the
beneficial owner, who acts as holder of record for securities and other assets.
Typically, this arrangement is done to facilitate the transfer of securities when it
is inconvenient to obtain the signature of the real owner, or the actual owner may
not wish to be identified. Nominee ownership simplifies the registration and
transfer of securities.
Pooled Investment: grouping of resources for the common advantage of the
participants.
Range Notes: investment whose coupon payment varies (e.g. either 7% or 3%)
and is dependent on whether the current benchmark (e.g. 30 year Treasury) falls
within a pre-determined range (e.g. between 6.75% and 7.25%).
Repurchase Agreement: contract to purchase and subsequently sell securities
at a specified date and price
Sweep Account: short-term income fund into which all uninvested cash
balances from the non-interest bearing checking account are automatically
transferred on a daily basis.
Third-party Custodian: corporate agent, usually a commercial bank, who,
acting as trustee, holds securities under a written agreement for a corporate
client and buys and sells securities when instructed. Custody services include
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a
securities safekeeping, and collection of dividends and interest. The bank acts
only as a transfer agent and makes no buy-sell recommendations.
Time Certificates of Deposit: deposit account paying interest for a fixed term,
with the understanding that funds cannot be withdrawn before maturity without
giving advance notice.
Unrealized Profits (Losses): paper profits (losses) representing the difference
between the book value of the securities owned and their current market value.
Paper profits (losses) in an investment portfolio are realized when the securities are sold.
Zero Accrual Periods: a period of time in which an investment accumulates no
interest.
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