HomeMy WebLinkAbout2002-01-08; City Council; 16500; Revision Of City Investment PolicyCITY OF CARLSBAD - AGENDA BILL
AB# IL I 500 TITLE:
MTG. 01/08/02 REVISION OF CITY INVESTMENT POLICY
DEPT: TRS
RECOMMENDED ACTION:
Adopt Resolution No.&Xl-o/O approving the City’s investment policy.
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 other
responsibilities, the City Treasurer must ensure that these funds will be available when
needed, and to manage this resource in a prudent way to provide an acceptable rate of return
on investment.
The Treasurer is guided in this process by the City’s investment policy, which, among other
things, states (1) investment objectives and strategy, (2) establishes investment authority
and responsibility, (3) establishes the acceptable level of risk, (4) stipulates reporting
requirements, and (5) provides for an investment review process.
Under section 53646(a) of the California Government Code the City Treasurer must present
an investment policy to the City Council for their review and approval on an as required
basis but no less frequently than once each year. These reviews give 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 Assistant
City Manager, Administrative Services Director, City Attorney or designee, an outside
financial advisor, and himself to review the status of investments and potential changes to
the policy prior to recommending these changes to the City Council.
The Investment Review Committee has completed the annual review of the investment
policy. The City’s investments are performing as desired and as designed by the City’s
investment policy.
The City Treasurer recommends two minor changes to bring the City Investments
Policy into conformance with the California Government Code. The requirements for
investments in bankers acceptances and commercial paper have been changed in the
California Government Code. Investments in bankers acceptances may not exceed 180-
day maturity, as opposed to 270 days. (Paragraph 8.1.2) Investments in commercial
paper may have a maximum maturity of 270 days, as opposed to 180 days. Additionally,
commercial paper may comprise up to 25% of the portfolio, with no more than 10% of
the outstanding paper of an issuing corporations, as opposed to 15% and 5%,
respectively. (Paragraph 8.1.5)
p=p2 of A04 Ib,soo
The portfolio investments are in compliance with the revised State code.
FISCAL IMPACT:
There is no fiscal impact.
EXHIBITS:
1. Resolution No.dbOd -Madopting a revised City investment policy.
2. Revised City Investment Policy.
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RESOLUTION NO. 2002-010
RESOLUTION OF THE CITY COUNCIL
OF THE CITY OF CARLSBAD, CALIFORNIA,
REVISING THE CITY’S INVESTMENT POLICY DATED JANUARY OS,2002
EXHIBIT 1
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 of investment policy; .
and
WHEREAS, the City Council may from time to time revise this policy as may
be necessary to provide proper guidance to City staff and the City Treasurer; and
WHEREAS, The City Treasurer has reviewed the existing investment policy
and has recommended modifications which improve the City’s ability to manage inactive
funds; and
NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of
Carlsbad, California, as follows:
1. The attached investment policy, revised January 08,2002, (Exhibit 2) is hereby
adopted and shall become effective immediately.
2. That the Council finds that the investment policy, revised January 08,2002,
(Exhibit 2) is in conformance with Sections 53601 and 53635 of the California
Government Code.
PASSED, APPROVED AND ADOPTED at a regular meeting of the City Council on the
the City Council on the 8th day of JANUARY ,2002, by the following
vote, to wit:
AYES: Council Membe
NOES: None
ABSENT: None
Nygaard, Hall
LO@INE M. WOOD, City Clerk (SEAL)
EXHIBIT 2
STATEMENT OF INVESTMENT POLICY
CITY OF CARLSBAD
Submitted by: Jim Stanton, City Treasurer
January 08,2002
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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 & Responsibilities.. .................................................................................. .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.. ......................................................................................... .6
Selection of Financial Institutions and Brokers .................................................. .6
Purchase, Payment and Delivery.. ...................................................................... 7
Safekeeping and Custody.. ................................................................................. 7
Performance Standard for Pooled Investments.. ............................................... .7
Reporting.. .......................................................................................................... .8
Short Term Borrowing.. ....................................................................................... 9
Short Term Loan ...................................................................................... .9
Line of Credit.. .......................................................................................... .9
Exceptions .......................................................................................................... 9
Internal Control .................................................................................................... 9
Review ............................................................................................................... .9
Investment Policy Adoption.. ............................................................................. 10
Glossary.. .......................................................................................................... 11
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CITY OF CARLSBAD
STATEMENT OF INVESTMENT POLICY
Approved by City Council January 9,200l
1.0 Introduction. The purpose of this document is to identify various policies and
procedures that enhance opportunities for a prudent and systematic investment policy
and to organize and formalize investment-related activities. Related activities which
comprise good cash management include accurate cash projections, the expeditious
collection of revenue, the control of disbursements, cost-effective banking relations, and
arranging for a short-term borrowing program which coordinates working capital
requirements and investment opportunities.
2.0 Policy. It is the policy of the City of Carlsbad to invest public funds not required
for immediate day-to-day operations in safe and liquid investments having an
acceptable return while conforming to all state statutes and the City’s Investment
Policy governing the investment of public funds.
3.0 Scope. It is intended that this policy cover the investment activities of all
contingency reserves and inactive cash under the direct authority of the City.
3.1 Pooled Investments. Investments for the City and its component units will
be made on a pooled basis, including the City of Carlsbad, the Housing authority
of the City of Carlsbad, the Parking Authority of the City of Carlsbad, the City of
Carlsbad Public Improvement Corporation, the Carlsbad Redevelopment Agency,
and the Carlsbad Municipal Water District. The City’s Comprehensive Annual
Financial Report identifies the fund types involved as follows:
l General Fund
l Special Revenue Funds
l Debt Service Funds
l Capital Project Funds
l Enterprise Funds
l Internal Service Funds
l Redevelopment Funds
l Trust Funds
l Miscellaneous Special Funds
l Any new funds created by the City Council, unless specifically exempted.
3.2 Investments held separately. Investments of bond proceeds will be held
separately when required by the bond indentures or when necessary to meet
arbitrage regulations. If allowed by the bond indentures, or if the arbitrage
regulations do not apply, investments of bond proceeds will be held as part of the
pooled investments.
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4.0 Objectives. Section 53600.5 of the California Government Code outlines the
primary objectives of a trustee investing public money. The primary objectives, in order
of priority, of the City’s investment activities shall be:
4.1 Safety. Safety of principal is the foremost objective of the investment
program. Investments of the City shall be undertaken in a manner that seek to
ensure preservation of capital in the overall portfolio.
4.2 Liquidity. The City’s investment portfolio will remain sufficiently liquid to
enable the City to meet all operating requirements which might be reasonably
anticipated.
4.3 Return on investment. Investment return becomes a consideration only
after the basic requirements of safety and liquidity have been met. The City shall
attempt to obtain. an acceptable return provided that the requirements of safety
and liquidity are first met.
The City Treasurer shall strive to maintain the level of investment of all contingency
reserves and inactive funds as close to 100% as possible. While the objectives of
safety and liquidity must first be met, it is recognized that portfolio assets represent a
potential source of significant revenues. It is to the benefit of the City that these assets
be managed to produce optimum revenues, consistent with state statutes and local
ordinances.
5.0 Duties and Responsibilities. By the annual adoption of this policy, the
management of inactive cash and the investment of funds identified in paragraph 3.1 is
the responsibility of the City Treasurer as directed by the City Council. Under the
authority granted by the City Council, no person may engage in an investment
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 accounts
with qualified financial institutions and brokers/dealers for the purpose of effecting
investment transactions in accordance with this policy. The criteria used to select
qualified financial institutions and brokers/dealers are identified in paragraph 15 of this
policy.
The City Treasurer may designate in writing a Deputy City Treasurer, who in the
absence of the City Treasurer, will assume the City Treasurer’s duties and
responsibilities. The City Treasurer shall retain full responsibility for all transactions
undertaken under the terms of this policy.
In the endeavor to have all inactive cash invested all the time, the City Finance Director
will assist the City Treasurer in the gathering of information to create cash flow
estimates.
6.0 Prudence. Section 53600.3 of the California Government Code identifies as
trustees those persons authorized to make investment decisions on behalf of a local
agency. As a trustee, the standard of prudence to be used shall be the “prudent
investor” standard and shall be applied in the context of managing the overall portfolio.
Investments shall be made with judgment 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.
Investment officers acting in accordance with written procedures and the investment .
policy and exercising due diligence shall be relieved of personal responsibility for an
individual security’s credit risk changes or market price changes, provided deviations
from expectations are reported in a timely manner and appropriate action is taken to
control adverse developments.
7.0 Ethics and conflicts of interest. All participants in the City’s investment process
shall seek to act responsibly as custodians of the public trust. Officers and employees
involved in the investment process shall refrain from personal business activity that
could conflict with proper execution of the investment program, or which could impair
their ability to make impartial investment recommendations and decisions. Investment
officials and employees shall make all disclosures appropriate under the Fair Political
Practices Act and may seek the advice of the City Attorney and the Fair Political
Practices Commission whenever there is a question of personal financial or investment
positions that could represent potential conflicts of interest.
8.0 Authorized investments.
8.1 Pooled investments. The City Treasurer may invest City funds in the
following instruments as specified in the California Government Code, Section
53601, and as further limited in this policy.
8.1 .I Obligations of the U.S. Government, its agencies and
instrumentalities.
8.1.2 Bankers Acceptances that are eligible for purchase by the Federal
Reserve System. Purchases may not exceed days maturity 1
or 25% of the portfolio.
8.1.3 Time Certificates of Deposit. Deposits should not exceed one year
maturity. Deposits will be collateralized as specified in paragraph 9.0
of this Investment Policy.
8.1.4 Negotiable Certificates of Deposit issued by nationally or state-
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 Moody’s
Investment Services, Inc. or Standard & Poors Corporation. Further,
eligible paper is limited to issuing corporations that are organized and
operating within the United States and having total assets in excess
of $500 million. If the issuer has other existing debt, it must have a
“AA” or higher credit rating from either Moody’s Investment Services,
Inc. or Standard and Poors Corporation. Purchases may not exceed
days maturit % of the portfolio, and may not
nt more than e outstanding paper of an issuing
corporation.
8.1.6 Repurchase Agreements with a maximum maturity of one week.
Repurchase Agreements will only be with primary dealers of the
Federal Reserve Bank of New York, and who have long-term debt
rated in the ‘AAA” or “AA” categories of Moody’s Investment
Services, Inc. or Standard and Poors Corporation. Investments will
be collateralized as specified in paragraph 9.0 of this Investment
Policy and may not exceed 5% of the portfolio.
8.1.7 Medium-term Corporate Notes of a maximum of five years until
maturity issued by corporations organized and operating within the
United States and rated in the “AAA” or “AA” categories of Moody’s
Investment Services, Inc. and Standard and Poors Corporation.
Purchases may not exceed 30% of the portfolio.
8.1.8 Money market funds (whose portfolio consists of one or more of the
foregoing legal investments).
8.1.9 Sweep account for the investment of overnight funds when the funds
are swept into investments allowed by this policy.
8.1.10 Local Agency Investment Fund (LAIF) of the State of California.
Investments will be made in accordance with the laws and regulations
governing those Funds.
Investments will be made only in readily marketable securities actively traded in the
secondary market.
8.2 Investments held separately. Investments of bond funds will be made in
conformance with the trust indenture for each issue. Such investments will be
held separately when required.
9.0 Collateralization. Investments in time certificates of deposit shall be fully insured
up to $100,000 by the Federal Deposit Insurance Corporation or the Federal Savings &
Loan Insurance Corporation, as appropriate. Investments in time certificates of deposit
in excess of $100,000 shall be properly collateralized. Section 53652 of the California
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Government Code requires that the depository pledge securities with a market value of
at least 10% in excess of the City’s deposit as collateral in government securities, and
50% in excess of the deposit as collateral in mortgage pools. Section 53649 of the
California Government Code specifies that the City Treasurer is responsible for entering
into deposit contracts with each depository.
Investments in repurchase agreements must also be collateralized. In order to
anticipate market changes and provide a level of security for all funds, the _I
collateralization level will be 102% of market value of principal and accrued interest.
10.0 Unauthorized investments/investment activities. Section 53601.6 of the
California Government Code disallows the following investments acquired after January
1, 1996: inverse floaters, range notes, or interest-only strips that are derived from a
pool of mortgages. In addition, and more generally, investments are further restricted as
follows:
10.1 No investment will be made that has either (1) an embedded option or
characteristic which could result in a loss of principal if the investment is held to
maturity, or (2) an embedded option or characteristic which could seriously limit
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 strategy will generally be followed;
that is, investments once made will usually be held until maturity. A buy and hold
strategy will result in unrealized gains or losses as market interest rates fall or rise
from the coupon rate of the investment. Unrealized gains or losses, however, will
diminish as the maturity dates of the investments are approached or as market
interest rates move closer to the coupon rate of the investment. A buy and hold
strategy requires that the portfolio be kept sufficiently liquid to preclude the
undesired sale of investments prior to maturity. Occasionally, the City Treasurer
may find it advantageous to sell an investment prior to maturity, but this should
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 bond
proceeds will follow the trust indenture for each issue.
12.0 Diversification. The portfolio will be diversified to avoid incurring unreasonable
and avoidable risks regarding specific security types or individual financial institutions.
In addition to the limitations on specific security types indicated in paragraph 8.0 of this
Investment Policy, and with the exception of U.S. Treasury/Federal agency securities
and authorized pools, no more than 5% of the City’s portfolio will be placed with any
single issuer.
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13.0 Maximum maturities and maximum modified duration.
13.1 Pooled Investments. A policy of laddered maturities will be followed for
pooled investments. The following maturity requirements will apply as of the
month end of each reporting period.
13.1.1 Investments maturing within one year must be at least equal to the
approved operating budget of the current year. This requirement will be
met within 3 months following adoption of the current operating budget.
Remaining investments of the portfolio will not have a maturity greater
than 5 years from the current date except as provided in paragraph
13.1.3 of this Investment Policy.
13.1.2 The average portfolio investment maturity shall be 3 years or less. A
dollar-weighted average will be used in computing the average
maturity of the portfolio.
13.1.3 Before an investment is made in securities that mature more than 5
years from the current date, the City Treasurer and the Financial
Management Director will review the City’s long term cash needs. Both
must concur before such an investment is made. Investments beyond 5
years will not be greater than 10% of the portfolio, and will be counted
in the percentage of the portfolio that may mature beyond 1 year. No
investments will be made that mature beyond IO years from the current
date.
13.1.4 Callable investments will be recorded at their maturity dates.
13.2 Maximum modified duration. The investment restrictions identified in
paragraphs 8.0 and 10.0, and the maturity requirements identified in paragraph
13.1, imply that the value of City investments should not change more than
1.8% for every 1% change in market interest rates. To ensure that this is the
case, a maximum modified duration is established at 1.8. This states that the
unrealized gains and losses of the portfolio are not expected to exceed 1.8%
for every I % change in market interest rates. A modified duration in excess of
1.8 would indicate that the portfolio is exposed to more market risk than is
desired by this policy. If the modified duration of 1.8 is exceeded, an
explanation will be made in the first monthly report following the occurrence.
As an indication of the market risk involved in a modified duration of 1.8, a U.S.
Treasury instrument that matures in two years has a modified duration of 1.8.
13.3 Investments Held Separately. Maturities for investments held separately
will conform with the trust indenture for each issue.
14.0 Selection of financial institutions and brokers/dealers. Investments shall be
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purchased only through well established, financially sound institutions. The City
Treasurer shall maintain a list of financial institutions and broker/dealers approved for
investment. All financial institutions and broker/dealers who desire to become -qualified
bidders for investment transactions will be given a copy of the City’s Investment Policy,
and a return cover letter which must be signed indicating that the investment policy has
been read and understood. Qualified financial institutions and broker/dealers must
supply the City Treasurer with the following:
14.1 Financial Institutions. * .._ .(
l Current audited financial statements.
l Depository contracts, as appropriate. .
l A copy of the latest FDIC call report or the latest ~FHLBB report, as
appropriate.
l Proof that commercial banks, savings banks, or savings and loan
associations are state or federally chartered.
14.2 Broker/Dealers.
l Current audited financial statements.
l Proof that brokerage firms are members in good standing of a
national securities exchange.
Commercial banks, savings banks, and savings and loan associations must maintain a
minimum net worth to asset ratio of 3% (total regulatory net worth divided by total
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 practical,
will be used to place all investment transactions. When two or more investment
opportunities offer essentially the same maturity, liquidity, yield, and quality, priority will
be given first to the financial institutions based in the City of Carlsbad, and second to
other financial institutions in the State of California.
Purchases on margin will not be made. Payment for securities will be done on a
Delivery Versus Payment (DVP) basis via the City’s custodian. Delivery of securities
will be made to the City in accordance with the third party custodial agreement.
16.0 Safekeeping and custody. All security transactions, including collateral for
repurchase agreements, entered into by the City shall be conducted on a delivery-vs.-
payment basis. All securities owned by the City will be held by a third-party custodian
designated by the City Treasurer and evidenced by a monthly statement from the
custodian. All securities will be held in the nominee name of the custodian. Collateral
for time deposits in savings and loans will be held by the Federal Home Loan Bank or
an approved Agent of Depository. Collateral for time deposits in banks will be held in
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 buy
and hold strategy for pooled investments will cause the investment portfolio to attain a
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market-average rate of return throughout budgetary and economic cycles,
commensurate with the investment risk constraints and the cash flow needs. Since the
amount maturing within one year must be at least equal to the currently approved
operating budget, the rate of return will be more closely related to, but lag behind,
changes in short-term market rates. The rate of return of the investment portfolio will be
based on the maturity value of the investments. A dollar-weighted average of yields to
maturity will be used in calculating the rate of return of the entire portfolio.
18.0 ,Reporting. Sections 53607 and 53646. of the California Government Code j
require reports of investments and transactions to the City Council, City Manager, and
internal auditor (or the Finance Director in the absence of an internal auditor).
18.1 Pooled investments. The investment report shall be submitted monthly by
the City Treasurer within 30 days following the end of the month covered by the
report. The monthly report shall include the following elements:
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ltemized listing of portfolio investments by type, date of maturity, yield to
maturity, and issuer.
Par value, dollar amount invested, amortized cost, and current market value
as of the date of the report will be given for the total of all securities,
investments, and moneys held by the City and its component units. The
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 the
report
Weighted average modified duration of the portfolio
Dollar amount and percentage of portfolio maturing within one year
Dollar amount and percentage of portfolio maturing between one 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 City’s
cash flow demands for the next six (6) months
Statement of compliance of the portfolio with the City’s Investment Policy.
When applicable, any material exceptions will be noted.
An annual report for pooled investments will also be made to the City Council following
the close of the fiscal year. Among other items, the annual report will include an
analysis of the composition of the portfolio with regard to fund source; a review of
trends regarding the size of the fund, portfolio yields, and cash income; and a statement
regarding anticipated fund activity in the next fiscal year.
18.2 Investments held separately. A report of investments held separately,
including deferred compensation balances, shall be made quarterly within 30 days
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following the end of the quarter and submitted as an exhibit in the City Treasurer’s
monthly report. The quarterly report shall contain the information required by
Section 53646 when available.
19.0 Short-term borrowing. The City is permitted by law to borrow money to meet
current short-term cash flow needs. These needs may arise either because projected
cash disbursements exceed projected cash receipts, or because the City’s cash
accounts may be temporarily overdrawn due to the efforts to invest 100% of inactive
funds at all times. To provide for these contingencies the City Treasurer is authorized
to take the following actions:
19.1 Short-term loan. When there is a shortfall between projected cash
revenues and projected cash disbursements, the City Treasurer will secure a loan
in the amount that would equal the cash deficit plus projected cash disbursements
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 the
City’s bank in an amount to cover sums temporarily overdrawn because of efforts
to invest all inactive funds at all times.
20.0 Exceptions. Occasionally, exceptions to some of the requirements specified in
this Investment Policy may occur for pooled investments because of events subsequent
to the purchase of investment instruments, e.g., the rating of a corporate note held in
the portfolio is downgraded below an “AA” rating, or total assets in the portfolio decline
causing the percentage invested in corporate notes to rise above 30%, or an
unforeseen expenditure causes investments maturing within one year to fall below the
approved operating budget of the current fiscal year.
State law is silent as to how exceptions should be corrected. Exceptions may be
temporary or more lasting; they may be self-correcting or require specific action. If
specific action is required, the City Treasurer should determine the course of action that
would correct exceptions to move the portfolio into compliance with State and City
requirements. Decisions to correct exceptions should not expose the assets of the
portfolio to undue risk, and should not impair the meeting of financial obligations as they
fall due. Any subsequent investments should not extend existing exceptions.
Exceptions, and the decisions to correct the exceptions, will be reviewed with the
Investment Review Committee referred to in paragraph 22.0 below.
21.0 Internal control. This policy and the strategy for and conduct of the investment
of City funds will be reviewed by an Investment Review Committee as set forth below
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 conduct
reviews of the City’s investment portfolio, the strategy being utilized for the investment
of City funds, and the City’s investment policy. This Committee will be composed of the
City Treasurer (acting as the Chair), the City Attorney or designee, the Assistant City
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Manager, the Administrative Services Director, and the Deputy City Treasurer (when
not one of the foregoing). Additionally, an outside financial advisor may be included as
an advisor without a vote. The Committee will convene periodically as necessary or
desirable but no less frequently than once each quarter.
23.0 Investment policy adoption. Section 53646(a) of the California Government
Code requires the City Treasurer to render to the City Council and the Investment >
Review Committee a statement of investment’ policy no less frequently than once.
each: year. The City’s investment policy and any modifications thereto shall be : :: .. ’
considered at a public meeting. Adoption .shall be made by resolution of the City -.
Council.
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GLOSSARY
Amortized Cost: cost of investments adjusted for amortized premiums and
discounts. Amortized cost is used to maintain comparability with market value.
Arbitrage Regulation: law to control the use of profit making by purchasing
securities on one market for immediate resale on another in order to profit from a
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
obligations of a bond issuer and the powers of the bond trustee, who has the
responsibility for ensuring that interest payments are made to registered
bond holders.
Bookvalue: a term synonymous with amortized cost.
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 security to 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
when the buyer has securities in hand or a book entry receipt.
Embedded Option: a statement within the bond structure that would alter the
interest rate earned by the bond.
Interest-Only Strips: mortgage backed instrument where investor receives only
the interest, no principal, from a pool of mortgages. Issues are highly interest
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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: a bond or note that does not earn a fixed rate of interest.
Rather, the interest rate that is earned is tied to a specific interest-rate index / :
identified in the bond/note structure. The interest rate earned by the bond/note
will move in the opposite direction of the index, e.g., if market interest rates as
measured by the selected index rises, the interest rate earned by the bond/note
will decline. An inverse floater increases the market rate risk and modified
duration of the investment.
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 Office 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.
Market Risk: the risk that market interest rates will rise causing a loss of value
in investments held. All investments made by the City involve a degree of
market risk. See also “Unrealized Gains (Losses).
Modified Duration: a measure of the sensitivity that the value of a fixed-income
security has to changes in market rates of interest. Modified duration is the best
single measure of a portfolio’s or security’s exposure to market risk. Modified
duration identifies the potential gain/loss in value before the gain/loss actually
occurs. It is a prospective measurement, e.g., a modified duration of 1.5
indicates that when and if a 1% change in market interest rates occurs, a 1.5%
change in the value of a security will result. Investments with modified durations
of one to three are considered to be relatively conservative.
Negotiable Certificates of Deposit: large denomination ($100,000 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.
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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. L
Range Note: 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
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 Gains (Losses): increases (decreases) in the value of investments
representing the difference between the amortized cost of the investments and
their current market value. Increases (decreases) in value are caused primarily
by changes in market interest rates subsequent to purchasing the investments.
Increases (decreases) in value indicate two things: 1. The portfolio has a
potential gain (loss) in principal if the securities are sold, and 2. The portfolio is
overperforming (underperforming) the current market for similar investments. An
increase in value indicates the portfolio is earning relatively more interest than
current market conditions, and a decrease in value indicates that the portfolio is
earning relatively less interest than current market conditions.
Zero Accrual Periods: a period of time in which an investment accumulates no
interest.
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