RES-ORA-0429 Statement of Investment Policy FY 2003-04RESOLUTION NO. ORA-
0429 A RESOLUTION OF THE
ORANGE REDEVELOPMENT AGENCY APPROVING
AND ADOPTING A STATEMENT OF
INVESTMENT POLICY FOR FISCAL YEAR 2003-
04 AND DELEGATING INVESTMENT
OF ORANGE REDEVELOPMENT AGENCY FUNDS
TO THE TREASURER OF THE CITY
OF ORANGE.WHEREAS, Government Code Sections 53600 et seq. set forth
detailed provisions regarding permitted and prohibited investments by public agencies, including
the Orange Redevelopment Agency, and accountability
therefor; and WHEREAS, the Board of Directors of the Orange Redevelopment
Agency adopted Resolution No. ORA-0402 on October 9, 200], adopting
the Orange Redevelopment Agency's Statement of Investment Policy for Fiscal Year 2001-02 (herein
referred to as the
FY 2001-02 SIP); and WHEREAS, the FY 2001-02 SIP requires that
the City Council armually review its and the Orange Redevelopment Agency's Statement of
Investment Policy and adopt a policy annually within 120 days of the end of each fiscal year by a
resolution and vote of the City Council at a public meeting, and separately by the
Board of Directors
of the Orange Redevelopment Agency; and WHEREAS, the City's Investment
Oversight Committee has reviewed the Statement of Investment Policy for Fiscal Year 2003-04 in
the form attached to this Resolution as Attachment I and incorporated herein by this reference (
herein referred to as the Fiscal Year 2003-04 SIP) and recommends that the City
Council and the Board of Directors of the Orange Redevelopment
Agency adopt the Fiscal Year 2003-04 SIP; and WHEREAS,
the General Counsel of the Orange Redevelopment
Agency has reviewed the fiscal Year 2003-04 SIP; and WHEREAS, the
Board of Directors of the Orange Redevelopment Agency desires to authorize the City Treasurer
to invest the funds of the Orange
Redevelopment Agency in accordance with the Fiscal Year 2003-04 srp.NOW, THEREFORE,
BE IT RESOLVED by
the Board
of Directors of the Orange RedeveIopment Agency as follows:SECTION I:That the Fiscal Year 2003-
04 SIP, in the form attached hereto as Attachment 1, is the Orange
Redevelopment Agency's Statement of Investment Policyand is duly adopted in accordance with State
SECTION II:
That the Treasurer of the City of Orange is hereby authorized and directed to invest
the funds of the Orange Redevelopment Agency on behalf of the Orange Redevelopment
Agency in accordance with the terms and provisions of the Fiscal Year 2003-04 SIP in
the forrn attached hereto as Attachment
1.ADOPTED this 14th day of October,
2003.
M(!~;y.
cmirm
ATTEST:4.1A'~~~
f Cassandra J. C art,
Clerk I, CASSANDRA J. CATHCART, Clerk of the Orange Redevelopment
Agency,Orarlge, California, do hereby certify that the foregoing Resolution was duly and
regularly adopted by the Orange Redevelopment Agency at a regular meeting thereof held on the
14th day of October, 2003, by the following
vote:
AYES:
NOES:
ABSENT:
ABSTAIN:DIRECTORS: Ambriz, Alvarez, MUlphy, Coontz,
Cavecche DIRECTORS:
None DIRECTORS:
None DIRECTORS:
None i~-;(-Cassandra
J. Ca cart, Clerk 2
CITY OF ORANGE AND
ORANGE REDEVELOPMENT AGENCY
STATEMENT OF INVESTMENT POLICY
Fiscal Year 2003-
04 Section Pae:
e 1.0 INVESTMENT POLICY
OVERVIEW l.l Policy
I 1.2 Purpose
11.3 Investment Objectives
11.4 Prudence
21.5 Ethics
2 2.0 OPERATIONS AND
PROCEDURES2.1 Scope
2 2.2 Delegation Of Authority
32.3 Investment Oversight Committee
42.4 Authorized Institutions And Dealers
42.5 Collateral Requirements
5 2.6 Safekeeping And Delivery
5 3.0 PERMITTED INVESTMENTS AND RISK
MANAGEMENT 3.1 Investments Authorized
6 3.2 Prohibited Investment Vehicles And Practices
7 3.3 Mitigating Risk In The Portfolio
8 4.0 REPORTING, REVIEW AND
AUDITS 4.1 Monthly Reports
9 4.2 Internal Controls
10 4.3 Annual Audit
104.4 Special Audits
10 5.0 INVESTMENT POLICY ADOPTION
10 5.1 INVESTMENT POLICY CERTIFICATION
10 GLOSSARY
Attachment I
CITY OF ORANGE AND
ORANGE REDEVELOPMENT AGENCY
STATEMENT OF INVESTMENT POLICY
Fiscal Year 2003-
04 1.0 INVESTMENT POLICY
OVERVIEW1.1
POLICY It is the policy of the City of Orange ("City") and Orange Redevelopment
Agency Agency", which with the City shall be referred to herein collectively as
the City") to invest public funds in a manner which will provide foremost for
the safety of principal while meeting the short- and long-term cash flow
demands of the City and conforming to all statutes governing the investment of
City funds.Annually, in accordance with California Government Code ("
CGC'') Section 53646, the Treasurer will render to the City Council a Statement
of Investment Policy for consideration and approval at a public meeting.
Any investment currently held at that time that does not meet the guidelines of this
policy, as changed from time to time by the City Council, shall be exempt
from the requirements of this policy. However, at the investment's maturity
or liquidation,such funds shall be reinvested only as provided by
this policy.1.
2 PURPOSE This Statement of Investment Policy ("SIP") is set forth by the City
for the
following purposes:a) To establish a clear understanding for the City
Council, Investment Committees, City management, responsible employees, citizens
and third parties, of the objectives, policies and guidelines for the investment
of the City's idle and
surplus funds.b) To offer guidance to investment staff, brokers and any
external investment advisors on the investment of
City funds.1.3
INVESTMENT OBJECTIVES Within the overriding requirement of compliance with all Federal, State
and local laws governing the investment of moneys under the control of the
Treasurer, and as specified in the CGC Section 53600.5, when investing,
reinvesting, purchasing,acquiring, exchanging, selling and managing public funds, the
primary objectives,in priority order, oflhe investment activities
shall
a) Safety: Safety of principal is the foremost objective of the investment
program. Investments of the City shall be undertaken in a manner that seeks
to ensure the preservation of capital in the overall portfolio.
b) Liquidity: The investment portfolio will remain sufficiently liquid to enable
the City to meet all operating requirements which might be reasonably
anticipated.
c) Return on Investments: The investment portfolio shall be designed and
managed with the objective of attaining a market rate of return throughout
budgetary and economic cycles, taking into account the investment objectives,
authorized investments and the cash flow needs of the City. The Treasurer's
monthly reports shall include benchmark reporting to define "a market rate of
return "; which shall be one of the indices published in a financial journal of
wide circulation that are most comparable to the Treasurer's portfolio. The
benchmark shall be used solely as a reference tool. The Treasurer shall not
add additional risk to the portfolio in order to attain or exceed the benchmark.
1.4 PRUDENCE
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. The standard of prudence to be used by investment officials shall be
the "prudent investor" standard (CGC Section 53600.3) and shall be applied in the
context of managing an overall portfolio. The Treasurer and other investment
employees, acting within the intent and scope of the SIP and other written
procedures, and 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 n:ported in the immediately following
Treasurer's Report and appropriate action is taken to control adverse
developments. When a deviation poses a significant risk to the City's financial
position, the City Council shall be notified immediately.
1.5 ETHICS
Elected officials, City officers and employees and any other individuals involved
in the investment operations are prohibited from personal business activity that
could conflict with the proper execution of the investment program, or which
could impair their ability to make impartial investment decisions, or which could
give the appearance thereof. Furthennore, these same individuals are prohibited
from undertaking personal investment transactions with any individual with
whom business is conducted on behalf of the City.
2.0 OPERATIONS AND PROCEDURES
2.1 SCOPE
a) This SIP applies to all financial assets of the City and the Agency. These
funds are accounted for in the Comprehensive Annual Financial Report
2
CAFR) and include: General Fund, Special Revenue Funds, Debt Service
Funds, Capital Project Funds, Enterprise Funds, Internal Service Funds
and Agency Funds.
b) This SIP specifically exempts and does not apply to the following financial
assets and investment activities of the City and the Agency:
I) The Cily's Deferred Compensation Plan is excluded because it is
managed by a third party administrator and invested by individual
plan participants.
2) Proceeds of City or Agency bonds or other debt issues in
possession of a trustee or fiscal agent are not considered to be part
of the financial assets covered by this policy. These bond proceeds
shall be invested in accordance with the requirements and
restrictions outlined in the bond documents.
2.2 DELEGATION OF AUTHORITY
a) The City Council's authority to manage the investment program is derived
from CGC Sections 53600, et seq.
b) In accordance with the City of Orange Municipal Code Chapter 2.26,
management responsibility for the investment program is hereby delegated to
the Treasurer, who shall establish written procedures for the operation of the
investment program consistent with this SIP. Under the provision of CGC
Section 53600.3, the Treasurer is a trustee and a fiduciary subject to the
prudent investor standard.
c) The Treasurer may delegate all, or a portion of, his/her investment authority to
a Deputy City Treasurer. Prior to the delegation of the investment authority to
a Deputy City Treasurer, the City Treasurer shall notify the City Council and
request confirmation of the delegation. Delegation of investment authority
will not remove or abridge the Treasurer's investment responsibility.
d) The City Council may engage the services of one or more external investment
managers to assist in the management of the City's investment portfolio in a
manner consistent with the City's objectives and in accordance with this SIP.
Such external managers may provide advice and effectuate trades upon
specific authorization for each transaction. Such managers must be registered
under the Investment Advisors Act of 1940 and must have not less than five
years' experience investing in the securities and obligations authorized by the
CGC Section 53601, and with assets under management in excess of five
hundred million dollars ($500,000,000). The Treasurer shall review Form
ADV of any investment advisor prior 10 engagement by the City Council.
This Section does not preclude the Treasurer from retaining portfolio
consultants within existing authority.
3
2.3 INVESTMENT OVERSIGHT COMMITTEE
a) The Orange Municipal Code Chapter 2.50 et seq. of Title 2 establishing an
Investment Oversight Committee (rOC) is hereby made part of this SIP. The roc
consists of the Treasurer, the City Manager or designee, and the Director of
Finance. The Treasurer shall act as Chair of the committee, with the City
Manager as Vice Chair. The roc shall act by majority vote.
b) The roc shall, at least annually and more often if directed by the City Councilor
agreed by a majority of the roc, review the City Council's adopted SIP and report
to the City Council its recommendations for any changes, additions or deletions to
the SIP.
c) The roc shall monitor the implementation of the City Council's adopted SIP and
annually submit a compliance report to the City Council.
d) The roc shall review reports to the City Council from the Investment Advisory
Committee and prepare responses as required.
e) The roc shall meet and report quarterly to the City Council summarizing the roc
meetings and the recommendations of the Investment Advisory Committee. Such
report shall contain an unedited copy of the Investment Advisory Committee's
recommendations.
2.4 AUTHORIZED FINANCIAL INSTITUTIONS AND DEALERS
a) Institutions eligible to transact investment business with the City shall
include only the following:
I) Primary government dealers as designated by the Federal Reserve
Bank;
2) Nationally or state-chartered
banks;3) The Federal Reserve Bank;
and 4) Direct issuers of securities eligible for purchase by the
City.b) Selection of financial institutions and broker/dealers authorized to
engage in transactions with the City shall be at the sole discretion of the
City Treasurer. The Treasurer will maintain a list of financial
institutions authorized to provide investment services to the
City.c) The City Treasurer shall obtain information from qualified
financial institutions to determine if the institution makes markets in
securities appropriate for the City's needs, can assign qualified sales
representatives and can provide written agreements to abide by the conditions set forth
in the City of Orange SIP. Investment accounts with all financial
institutions
shall be standard non-discretionary accounts and may not be
margin
accounts.d) All financial institutions which desire to become qualified bidders
for investment transactions must supply the Treasurer with the
following:1) Audited financial stalements for the institution's three most
recent fiscal
years;2) At least three references from California local agencies
whose portfolio size, investment objectives and risk preferences
are similar to the City'
s;3) A statement certifying that the institution has reviewed the
CGC Section 53600 et seq. and the City's SIP, and that all
securities offered to the City shall comply fully and in every instance with
all provisions of the Code and with this SIP;
and,4) Completed BrokerlDealer
Questionnaire.e) The Treasurer shall conduct an annual review of the financial condition
of qualified institutions. In addition, a current financial statement is
required to be on file for each qualified
institution.f) Public deposits shall be made only in qualified public depositories
within the State of California as established by State law. Deposits shall
be insured by the Federal Deposit Insurance Corporation (FDIC), or, to
the extent the amount exceeds the insured maximum, shall be
collateralized with securities in accordance with State
law.2.5 COLLATERAL
REQUIREMENTS CGC Sections 53652 and 53667 require depositories to post certain types
and levels of collateral for public funds on deposit above the FDIC insurance
amounts.The collateral requirements apply to bank deposits, both active (checking
and savings accounts) and inactive (non-negotiable time certificates
of deposit).2.6 SAFEKEEPING
AND DELIVERY a) To protect against fraud, embezzlement, or losses caused by
collapse of individual securities dealers, all securities owned by the City shall be
held in safekeeping by the City's custodial bank, a third party bank
trust department,acting as agent for the City under the terms of a custody
agreement, and shall be evidenced by
safekeeping receipts.b) All security transactions entered into by the City shall be conducted
on a standard delivery-versus-payment (DVl') basis,
which ensures that securities are deposited with the third party custodian prior to the
release of funds. All securities purchased or acquired shall be delivered to the
City by book entry,physical delivery or by third party custodial agreement
as required by CGC Section 53601. Investments in lhe Slale Pool or
money
are undeliverable, and are not subject to delivery or third party safekeeping
requirements.
c) On a daily basis, investment trades shall be verified against the bank
transactions and broker confirmation tickets to ensure accuracy. On a
monthly basis, the custodial asset statement is reconciled with the month end
portfolio holdings. On an annual basis, lhe external auditor confirms
investment holdings.
3.0 PERMITTED INVESTMENTS AND RISK MANAGEMENT
3.1 INVESTMENTS AUTHORIZED
The City, as empowered by CGC Sections 53601 et seq. and 16429.1, hereby
authorizes the City Treasurer to select investments from among the following:
a) United States Treasury notes, bonds,. bills or certificates of indebtedness,
or those for which the faith and credit of the United States are pledged for
the payment of principal and interest (Limits: Maximunl maturity at
purchase 5 years; no other limits.)
b) Obligations issued by banks for cooperatives, federal land banks, federal
intermediate credit banks, federal home loan banks, the Federal Home
Loan Bank, the Tennessee Valley Authority, or in obligations,
participations, or other instruments of, or issued by, or fully guaranteed as
to principal and interest by, the Federal National Mortgage Association, or
other instruments of, or issued by, a federal agency or a United States
government-sponsored enterprise. In every case, any issue purchased
must be fully guaranteed as to principal and interest by the full faith and
credit of the United States, or the issuing federal agency. (Limits:
Maximum maturity at purchase 5 years; maximum concentration $50 million
of portfolio; and excluding completely Government National
Mortgage Association bonds; i.e., GNMA'
s.)c) Shares of beneficial interest issued by diversified management
companies that are Money Market Mutual Funds, registered with the Securities
and Exchange Commission under the Investment Company Act of
1940 investing in the securities and obligations authorized by cae
Sections53601(b) and (e) only (i.e., U.S. Government issues only). Such
Funds must either carry the highest rating of at least two of the three
largest national rating agencies, or such funds must have retained an
investment adviser registered with the Securities and Exchange Commission with
not less than five year's experience managing money market mutual
funds with assets under management in excess of five hundred million
dollars 500,000,000). (Limits: maximum 90 days Weighted Average
Maturity;
maximum concentration $15 million, or 20%, of portfolio, whichever is
less.)
d) State of California Local Agency Investment Fund (LAIF) is permitted, with
the knowledge that the fund may invest in some vehicles allowed by statute
but not otherwise authorized by the City Council in this SIP (See Exhibit I).
The Treasurer shall obtain from the State Treasurer, no less than quarterly,
reports providing sufficient detail to adequately judge the risk inherent in the
LAIF portfolio, and shall inform the City Council immediately of any risks
noted that may warrant reconsideration of this investment vehicle. (Limits:
Maximum concentration $30 million combined limit for all accounts.)
e) Investment in new Government sponsored pools will be subject to due
diligence. A thorough investigation of the pool is required prior to investing,
and on a continual basis.
f) Funds held under the terms of a Trust Indenture or other contract or debt
issuance agreement may be invested al:cording to the provisions of those
indentures or agreements.
3.2 PROHIBITED INVESTMENT VEHICLES AND PRACTICES
The City Treasurer is prohibited from the following:
a) Borrowing for investment purposes ("Leverage") is prohibited.
b) Buying or selling securities "on Margin" is prohibited.
c) Investing in any instrument which is commonly known as a "derivative"
instrument (options, futures, swaps, caps, floors, collars, U.S. Treasury
zero coupon bonds, U.S. Treasury strips, interest only bonds, interest-
only strips derived from mortgage pools), or any investment that may result in
a zero interest accrual, even if held to maturity, is
prohibited.d) Under the provisions ofCGC Sections 53601.6 and 53631.5, the City
shall not invest any funds covered by this SIP in instruments known
as Structured Notes (e.g. inverse floaters, leverage floaters, structured CD'
s,range notes, equity-linked securities). Any such
investments
are prohibited.e) Trading securities for the sole purpose of speculating on
the future direction of interest rates
is prohibited.f) State law notwithstanding, any investments not
specifically described herein under Subsections 3.1 a) through 3.1 e)
are
3,.3 MITIGATING RISK IN THE PORTFOLIO
a) Credit Risk:
I) The City will diversify its investments in accordance with the
limits set forth in Subsection 3. 1 of this SIP to diminish the credit
risk resulting from concentrations.
2) The City, on occasion, may sell a security prior to its maturity
recording a gain or loss) in order to improve the risk structure,
liquidity and yield of the portfolio in response to market
conditions.
3) If securities owned by the City are downgraded by either Moody's
or S&P to a level below the quality required by this SIP, it shall be
the City's policy to review immediately the credit situation and
make a determination as to whether to sell or retain such securities
in the portfolio.
i) If a security is downgraded two grades below the level
required by the City, the security shall then be sold
immediately.
ii) If a security is downgraded one grade below the level
required by this policy, the Treasurer will use discretion in
determining whether to sell or hold the security based on its
current maturity, the loss in value, the economic outlook for
the issuer, and other relevant factors.
iii) If a decision is made to retain a downgraded security in the
portfolio, its presence in the portfolio will be monitored and
reported monthly to the IOC and the City Council.
b) Market Risk: While the City recognizes that longer term portfolios
achieve higher returns, longer term portfolios have higher volatility of total
return. The City will limit market risk by limiting the concentrations,
volume and duration of its longer term investments, as well as limiting
them to funds which are not needed for current year cash flow purposes
1) Maturities selected shall provide for stability of income and
liquidity, and shall not exceed 5 years from the date of purchase.
No more than 50% of the portfolio shall exceed 2.5 years to
maturity.) The City shall structure its investment portfolio as a
maturity ladder. Funds not required for purposes of meeting cash
flow needs shall be invested in permitted securities so that selected
percentages of the portfolio mature each year to a maximum of five
years.
8
2) Portfolio maturities shall be managed to avoid undue concentration
in any specific maturity sector.
3) The City shall invest only in fixed rate, fixed coupon securities.
4) The City may, on occasion, sell a security prior to its maturity
recording a gain or loss) in order to diminish the portfolio's
exposure to market risk.
4.0 REPORTING, REVIEW AND AUDITS
4.1 MONTHLY REPORTS
a) In accordance with CGC Section 53646, the Treasurer shall submit a
monthly investment report to the City Council, and it shall be due within
30 days of the end of each month. This report shall include a complete
description of the portfolio, the type of investments, the issuers, maturity
dates, par and dollar amounts invested on all securities, the current market
values of each component of the portfolio, the source of the portfolio
valuation, investments and moneys held by the City, and shall additionally
include a description of any of the City's funds, investments, or programs,
that are under the management of contracted parties, including lending
programs.
b) The report shall also include performance measures as recommended by
the Association for investment Management and Research (AIMR). These
shall include a presentation of Total Retum using accrual accounting, and
a Time-weighted Rate of Retum using a monthly valuation and one of
the AIMR approved methods of calculation. The report shall also include
a presentation of Yield to
Maturity.c) The report shall also include the performance of the benclnnark
described in Subsection 1.3 c) of this SIP as a basis of comparison for the City'
s
portfolio.d) The report shall also include the following
certifications:1) All investment actions executed since the last report have
been made in full compliance with the
SIP.2) The City will meet its expenditure obligations for the next
six months is required by CGC Sections53656(b)(2) and (
3).e) In accordance with cac 53646, the Treasurer
shall:I) Submit a copy of the City's monthly investment report for June
of each calendar year to the California Debt and Investment
Advisory Commission ("CDIAC") within 60 days after June 30th of
each calendar year,
and 2) Submit a copy of the City's monthly investment report
for December of each calendar year to CDIAC within 60 days
after December 31 ,t of each calendar year;
and
3) Submit the City's Statement of Investment Policy to CDlAC no
later than 60 days after the close of the second quarter of each
calendar year and 60 days after any subsequent amendments
thereto.
4.2 INTERNAL CONTROLS
The Treasurer is responsible for establishing and maintaining an internal control
structure designed to ensure that the assets of the City are protected from loss,
theft or misuse. The internal control structure shall be designed to provide
reasonable assurance that these objectives are met. Internal controls shall be in
writing and shall address the following points: separation of transaction authority
from accounting and record keeping, safekeeping of assets and written
confirmation oftelephone transactions for investments and wire transfers.
4.3 ANNUAL AUDIT
The Treasurer shall insure that the City's annual process of independent review by
an external auditor will include an appropriate investment review to assure
compliance with this policy and acceptable internal controls. The audit shall be
presented to the City Council upon its completion.
4.4 SPECIAL AUDITS
The City Council may at any time order an audit of the investment portfolio
and/or the Treasurer's investment practices.
5-.0 INVESTMENT POLICY ADOPTION
The SIP shall be reviewed annually by the City Council and the Agency Board for
consistency with the City's and the Agency's overall investment objectives
regarding preservation of principal, liquidity, return, relevance to current law as
well as to current financial and economic trends. Any modifications necessary
must be approved separately by the City Council and the Agency Board. The SIP
shall then be adopted in its entirety, as amended, within 120 days of the fiscal year
end by resolution and vote of the City Council at a public meeting, and separately
by the Agency Board regarding Agency assets.
i.l INVESTMENT POLICY CERTIFICATION
The 1999-2000 version of this investment policy was certified by the
Municipal Treasurer's Association of the United States and Canada, in June
2000.Recommended changes have been incorporated. In the event of any
significant changes in legislation that will require significant changes to the SIP, the City
will resubmit the new policy for
re-
GLOSSARY
AGENCIES: Federal agency securities
ASKED: The price at which securities are offered.
BANKERS' ACCEPTANCE (BA): A draft or bill or exchange accepted by a bank or
trust company. The accepting institution guarantees payment of the bill, as well as the
Issuer.
BENCHMARK: A segment of the securities market with characteristics similar to the
subject portfolio. It is used to compare portfolio performance to the performance of the
appropriate segment of the market. (e.g. 1- Year T -Bill rate)
mD: The price offered by a buyer of securities. (When you are selling securities, you
ask for a bid.) See Offer.
BROKER: A broker brings buyers and sellers together for a commission.
CERTIFICATE OF DEPOSIT (CD): A time deposit with a specific maturity
videnced by a certificate. Large-denomination CD's are typically
negotiable.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
moneys.COMMERCIAL PAPER: Short-term, negotiable unsecured promissory
notes
of corporations.COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAFR): The
official annual report for the City of Orange. It includes five combined statements for
each individual fund and account group prepared in conformity with GAAP. It also
includes supporting schedules necessary to demonstrate compliance with finance-related
legal and contractual provisions, extensive introductory material, and a
detailed Statistical Section.COUPON: (a) The annual rate of interest that a bond's issuer promises
to pay the bondholder on the bond's face value. (b) A certificate attached to
a bond evidencing interest due on
a payment date.DEALER: A dealer, as opposed to a broker, acts as a principal in
all transactions, buying aLlld selling for
his own account.DEBENTURE: A bond secured only by the general credit
of
DELIVERY VERSUS PAYMENT: There are two methods of delivery of securities:
ddivery versus payment and delivery versus receipt. Delivery versus payment is delivery
of securities with an exchange of money for the securities. Delivery versus receipt is
dl~livery of securities with an exchange of a signed receipt for the securities.
DISCOUNT: The difference between the cost price of a security and its maturity when
quoted at lower than face value. A security selling below original offering price shortly
aaer sale also is considered to be at a discouni.
nISCOUNT SECURITIES: Non-interest bearing money market instruments that
are issued a discount and redeemed at maturily for full fllce value; e.g., US Treasury
Bills.DIVERSIFICATION: Dividing investment funds among a variety of securities
offering independent
returns.FEDERAL CREDIT AGENCIES: Agencies of the Fedeml government set up
to supply credit to various classes of institutions and individuals; e.g., S&L's, small
business firms, students, farmers, farm cooperatives, and
exporters.FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC): A Federal
agency that insures bank deposits, currently up to $100,000 per
deposit.FEDERAL FUNDS RATE: The rate of interest at which Federal funds are traded.
This rate is currently pegged by the Federal Reserve through open-
market operations.F'EDERAL HOME LOAN DANKS (FOLD): The institutions that regulate and
lend to savings and loan associations. The Federal Home Loan banks playa role
analogous to that played by the Federal Reserve Banks vis-a-
vis member commercial banks.FEDERAL NATIONAL MORTGAGE
ASSOCIATION (FNMA): FNMA, like GNMA, was chartered under the Federal National Mortgage
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 f1~nds in the United States. Farmie Mae, as thE' corporation is
called, is a private stockholder-owned corporation. The corporations'
purchases include a variety of adjustable mortgages and second loans. In addition.
to fixed-rate mortgages. FNMA's securities are also highly liquid and are
widely accepted. FNMA assumes and guarantees that all security holders will
receive timely payment ofprincipal and interest.FEDERAL OPEN MARKET COMMITTEE (
FOMC): Consists of seven members of he Federal Reserve Board and five of the
twelve Federal Reserve Bank Presidents. The President of the New York Federal Reserve Bank is
a permanent member, while the other Presidents serve on a rotating basis. The
committee periodically meets to set Fedeml Reserve guidelines regarding purchases and sales
of Government Securities in the open market as a means of influencing the
volume
FEDERAL RESERVE SYSTEM: The central bank of the United States created by
Congress and consisting of a seven member Board of Governors in Washington, DC, 12
regional banks and about 5,700 commercial banks that are members ofthe system.
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA or Ginnie
Mae): Securities influencing the volume of bank credit guaranteed by GNMA and issued
by mortgage banks, commercial banks, savings and loan associations, and other
institutions. Security holder is protected by full faith and credit of the U.S. Government.
Ginnie Mae securities are backed by the FHA, V A or FMHM mortgages. The tenn
passthroughs" is often used to describe Ginnie Maes.
UQUIDITY: A liquid asset is one that can be converted easily and mpidly into cash
without a substantial loss of value. In the money market, a security is said to be liquid if
the spread between bid and asked prices is narrow and reasonable size can be done at
those quotes.
LOCAL AGENCY INVESTMENT FUND (LAlli): A pooled investment vehicle for
local agencies in California sponsored by the State of California and administered by the
State Treasurer.
MARKET CYCLE: A market cycle is defined as a period of time which includes a
minimum of two consecutive quarters of falling interest rates followed by a minimum of
two consecutive quarters of rising interest rates.
MARKET VALUE: The price at which a security is traded and could presumably be
purchased or sold.
MATURITY: The date upon which the principal or states value of an investment
becomes due and payable.
MONEY MARKET: The market in which short-term debt instruments (
bills,commercial paper, bankers' acceptances, etc.) are issued and
traded.NEGOTIABLE CERTIFICATE OF DEPOSIT: A large denomination certificate
of deposit which can be sold in the open market prior to
maturity.OFFER: The price asked by a seller of securities. (When you are buying securities,
you ask for an offer.) See Asked and
Bid.I>ORTFOLIO: Collection of securities held by an
investor.PRIMARY DEALER: group of govemment securities dealers who submit daily
reports of market activity and positions and monthly financial statements to the Fedeml
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 a few unregulated
firms.PRUDENT INVESTOR STANDARD: Governing bodies of local agencies or
persons authorized to make investment decisions on behalf of those local agencies
investing public funds pursuant to CGC Section 53600 et seq. are trustees and therefore
fiduciaries subject to the prudent investor standard. When investing, reinvesting,
purchasing,ac;quiring, exchanging, selling, and managing publk funds, a trustee shall act with
care,skill, prudence, and diligence under the circumstances then prevailing, that a
prudent p,erson acting in a like capacity and familiarity with those matters would use in
the conduct of funds of a like character and with like aims, to safeguard the principal
and maintain the liquidity needs of the agency. Within the limitations of the CGC
Section 53600 et seq. and considering individual investments as part to an overall strategy,
a tIustee is authorized to acquire investments as authorized by
law.QUALIFIED PUBLIC DEPOSITORIES: A financial institution which does not
claim exemption from the payment of any sale 01' compensating use or ad valorem taxes
under the laws of this state, which has aggregated for the benefit of the commission
eligible collateral having a value of not less than its maximum liability and which has
been approved by the Public Deposit Protection Commission to hold public
deposits.SAFEKEEPING: A service to customers rendered by banks for a fee whereby
securities and valuables of all types and descriptions are held in the bank's vaults for
protection.SECONDARY MARKET; A market made for the purchase and sale of
outstanding issues following the initial
distribution.SECURITIES & EXCHANGE COMMISSION: Agency created by Congress
to protect investors in securities transactions by administering securities
legislation.TIME CERTIFICATE OF DEPOSIT: A non-negotiable certificate of
deposit which cannot be sold prior
to maturity.TOTAL RATE OF RETURN: Represents growth (or decline) in the value
of a portfolio, including both capital appreciation and income, as a proportion of
the starting
market value.1rIME-WEIGHTED RATE OF RETURN: A modified measurement of
Total rate of Return which eliminates the effect of the timing of funds flows to and/or
from a
security or portfolio.TREASURY BILLS: A non-interest bearing discount security issued
by the U.S.Treasury to finance the national debt. Most bills are issued to mature
in three months, six
months,
TREASURY BOND: Long-term U.S. Treasury securities having initial maturities
of more than 10
years.TREASURY NOTES: A non-interest bearing discount security issued by
the US Treasury to finance the national debt. Most bills are issued to mature in one,
two, three,five or
ten years.YIELD: The rate of annual income return on an investment, expressed as
a percentage.YIELD TO MATURITY is the calculated rate ofretum based upon the present
value of the cash flow from each interest payment, plus the present value of the cash flow
from the investment's redemption value at maturity vs. the
purchase price.N :/
FinancelTreasurylInvestment
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