HomeMy WebLinkAbout2012-119-12/18/2012-ADOPTING AN UPDATED CITY INVESTMENT POLICY RESOLUTION 2012-119
OF THE COUNCIL OF THE CITY OF FORT COLLINS
ADOPTING AN UPDATED CITY INVESTMENT POLICY
WHEREAS,Article V, Section 12,of the City Charter states that the cash balance of the City
shall be deposited or invested in a manner approved by the City Council; and
WHEREAS, the types of securities in which City funds may be invested have been
established in Ordinance No. 108, 1988, as amended by Ordinance No. 090, 1993; and
WHEREAS,City Council believes it is in the best interests of the Cityto adopt an investment
policy that reflects current financial markets and provides guidance to the Financial Officer on
prudent investment practices that protect investment principal and maximize return on City
investments; and
WHEREAS,accordingly,the City Council adopted Resolution 1990-044 authorizing a Cash
Management and Investment Policy which established guidelines and limitations to be followed by
City staff in managing the investment of City Funds; and
WHEREAS,by Resolution 2008-121,the City Council adopted a revised Investment Policy
dated December 2, 2008 ("Investment Policy") that reflects the current financial markets and
provides guidance to the Financial Officer on prudent investment practices to protect investment
principal and maximize return on City investments; and
WHEREAS, City staff has determined that the Investment Policy should again be updated
to include guidelines for the way in which the City should address the financing needs of related
entities that support the mission and values of the City but do not possess the financial strength of
the City; and '
WHEREAS,City staff believes the best way to address the financing needs of related entities
supported by the City is by changing the Investment Policy's Inter-Fund Borrowing program to the
Inter-Agency Loan Program, as contained in an update to the Investment Policy dated December 18,
2012 (the "Updated Policy"), a copy of which is attached hereto as Exhibit "A" and incorporated
herein by this reference; and
WHEREAS,the City Council has determined that the Inter-Agency Loan Program will serve
the important public purpose of stabilizing the long term tax base of the City and providing
additional economic development benefits to the City; and
WHEREAS,the City's Financial Officer has determined that structuring the proposed inter-
agency loans in the manner described in the Updated Policy will ensure that the inter-agency loans
will constitute a reasonable investment for the City.
NOW, THEREFORE, BE IT RESOLVED BY THE COUNCIL OF THE CITY OF FORT
COLLINS that the Updated Policy is hereby approved by the City Council.
Passed and adopted at a regular meeting of the Council of the City of Fort Collins this 18th
day of December A.D. 2012.
Maydr
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City Clerk
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EXHIBIT A
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Investment Po ic
OP erating Tunds)
Originalf .Apri( 17, 1990 (Reso(ution 90-44)
updated: December 2, 2008 (Reso(ution 2008-121)
updated: December 1, 2009 (Reso(ution 2009- 109)
Updated: October S, 2010 (Reso(ution 2010-065)
Updated 1Decem6er 18, 2012 (12eso(ution 2012-119)
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City of Fort Collins
Investment Policy
I. Policy
The City of Fort Collins, Colorado (the "City") is a home rule municipality
operating under the City Charter. Article V, Part III of the City Charter assigns to the
Financial Officer the responsibility of investing City funds . Funds must be placed in
investments authorized by the City Council ("Council") . The Financial Officer will
administer the investment program to ensure effective and sound fiscal management.
It is the policy of the City to invest public funds in a manner which will provide
the highest investment return while protecting capital and meeting liquidity needs .
II. Scope
This policy is to establish guidelines for the efficient management of City funds
and for the purchase and sale of investments . This investment policy applies to the
investment of all general and special funds over which the City exercises financial
control, including operating funds, Poudre Fire Authority, the Downtown Development
Authority, Fort Collins Leasing Corporation and the Fort Collins Urban Renewal
Authority. For purposes of this policy, operating funds include :
General Fund;
Special Revenue Funds ;
Debt Services Funds (unless prohibited by bond ordinance) ;
Capital Projects Funds ;
Enterprise Funds;
Internal Service Funds;
Trust and Agency Funds ; and
Any newly created Fund, unless exempted by Council .
Unless specifically provided for in the bond ordinance, all bond proceeds, bond
reserve funds and pledged revenues must be invested in accordance with the operating
funds guidelines set forth in this Investment Policy. Guidelines for investing the funds of
the City' s defined benefit plan shall be included in the Investment Policy for the General
Employees ' Retirement Plan, which is monitored and approved by the General
Employees ' Retirement Committee .
III. Investment Objectives
The City' s principal investment objectives, in priority order, are : legal
conformance, safety, liquidity, and return on investment. All investments shall be
undertaken in a manner that seeks to ensure the preservation of capital in the overall
portfolio .
1. Legal conformance
The investment portfolio will conform to all legal and contractual requirements .
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2, Safety
Safety of investment principal and the preservation of capital are primary
objectives of the investment program. When making investment decisions, the
Financial Officer will seek to ensure the preservation of capital in the overall
portfolio by mitigating credit risk and interest rate risk.
a) Credit Risk: The Financial Officer will minimize the risk of loss of
principal and/or interest due to the failure of the security issuer or
backer by:
i . Limiting investments to the safest types of securities .
ii . Pre-qualifying financial institutions, securities brokers and
dealers, and advisors .
iii . Diversifying the investment portfolio to reduce exposure to any
one security type or issuer.
b) Interest Rate Risk: The Financial Officer will minimize the risk that
the market value of securities in the portfolio will fall due to changes
in market interest rates by:
i . Whenever possible, holding investments to their stated
maturity dates.
ii . Investing a portion of the operating funds in shorter-term
securities, money market mutual funds, or local government
investment pools .
3. Liquidity
The investment portfolio must be sufficiently liquid so as to meet all reasonably
anticipated operating cash flow needs. This is accomplished by structuring the
portfolio so that securities mature to meet cash requirements for ongoing
operations. Investments shall be managed to avoid, but not prohibit, sale of
securities before their maturities to meet foreseeable cash flow requirements .
Since all possible cash needs cannot be anticipated, the portfolio must consist
largely of securities with active secondary or resale markets.
4. Return on Investment
The investment portfolio will be designed with the objective of maximizing the
rate of return on investment while maintaining acceptable risk levels and
ensuring adequate liquidity. Return on investment is of secondary importance
compared to the safety and liquidity objectives described above . Investment
pooling may be used to maximize the City' s investment income. Interest
income, from pooling, will be distributed to the participating funds in proportion
to each fund' s level of contribution.
The Financial Officer will determine whether a security will be sold prior to
maturity. The following are examples of when a security might be sold :
a) A security with a declining credit rating may be sold early to minimize
loss of principal;
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b) A security swap would improve the quality, yield, return, or maturity
distribution of the portfolio ;
c) Liquidity needs of the portfolio require that the security be sold; or
d) The Financial Officer will obtain the best rate of return on investments
by taking advantage of market volatility and recognizing gains on a
portion of the portfolio .
IV. Standards of Care
1 . Prudence
The City has a fiduciary responsibility to protect the assets of the City and to
invest funds appropriately. The standard of care to be used by City officials is
the "prudent person" rule as specified by CRS 15 - 1 -304, which reads :
"Standard for investments : In acquiring, investing, reinvesting,
exchanging, retaining, selling, and managing property for the benefit of others,
fiduciaries shall be required to have in mind the responsibilities which are
attached to such offices and the size, nature, and needs of the estates entrusted
to their care and shall exercise the judgment and care, under the circumstances
then prevailing, which men of prudence, discretion, and intelligence exercise in
the management of the property of another, not in regard to speculation but in
regard to the permanent disposition of funds, considering the probable income
as well as the probable safety of capital. Within the limitations of the foregoing
standard, fiduciaries are authorized to acquire and retain every kind of property,
real, personal, and mixed, and every kind of investment, specifically including,
but not by way of limitation, bonds, debentures, other corporate obligations,
stocks, preferred or common, securities of any open-end or closed-end
management type investment company or investment trust, and participations in
common trust funds, which men of prudence, discretion, and intelligence would
acquire or retain for the account of another. "
The Financial Officer and designees, acting within the guidelines of this
investment policy and written procedures, the City Charter and Code, all
applicable state and federal laws and after exercising due diligence, will not be
held personally liable and will be relieved or personal responsibility for an
individual security' s credit risk or market price changes, or for losses incurred
as a result of specific investment transactions or strategies. (CRS 24-75 -601 .4,
et seq.)
2. Ethics and Conflicts of Interest
City officers and employees involved in the investment process will refrain
from personal business activity that could conflict with the proper execution and
management of the investment program, or that could impair their ability to
make impartial decisions . Employees and investment officials must disclose
any material interests in financial institutions with which they conduct business.
They must further disclose any personal financial and investment positions that
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could be related to the performance of the City' s investment portfolio . In
addition they must adhere to the rules of conflicts of interest as stated in Art. IV,
Section 9(b) of the Charter of the City of Fort Collins, Colorado.
3. Delegation of Authority
The City Charter assigns the responsibility for the collection and investment of
all city funds to the Financial Officer, subject to direction from Council by
ordinance or resolution. The Financial Officer, subject to City Manager
approval, may appoint other members of the Finance Department to assist in the
investment function.
a) Administrative Procedures
i . The Financial Officer is responsible for all investment
decisions and activities, and must regulate the activities of
subordinate employees for the operation of the City' s
investment program consistent with this investment policy.
ii . No person may engage in an investment transaction except as
provided under the terms of this Investment Policy and the
procedures established by the Financial Officer.
b) Authorized Designees
i . The Financial Officer will maintain a list of individuals and
institutions that are authorized to transfer, purchase, sell and
wire securities or funds on behalf of the City.
ii . This list will be provided to the securities broker or dealer or
financial institution prior to the City conducting any investment
transactions with the institution.
c) Investment Advisors
i . The Financial Officer has the discretion to appoint one or more
investment advisors, registered with the Securities and
Exchange Commission under the Investment Advisors Act of
1940, to assist in the management of all or a portion of the
City' s investment portfolio .
ii . All investments made through such investment advisors shall
be within the guidelines of this Investment Policy.
4. Investment Committee
The Investment Committee consists of the Financial Officer and at least 2 other
employees of the City that are knowledgeable in the area of governmental
investments . The Investment Committee, at the discretion of the Financial
Officer, may also include up to 2 private sector investment or banking
professionals . The purpose of the Investment Committee shall be to provide
advice to the Financial Officer regarding the operation of the investment
program.
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V. Safekeeping and Custody
1 . Authorized Securities Brokers and Dealers and Financial institutions
a) The Financial Officer will maintain a list of financial institutions
authorized to provide investment services. The Financial Officer will
also maintain a list of approved securities brokers and dealers . This
list may include "primary" dealers or regional dealers that qualify
under Securities and Exchange Commission (SEC) Rule 15C3 - 1 .
b) All financial institutions and securities brokers and dealers who wish
to provide investment services to the City must supply the following
(as appropriate) :
i . Current audited financial statements;
ii . Completed securities broker and dealer questionnaire ;
iii . Proof of National Association of Securities Dealers
certification and registration in the State of Colorado ; and
iv. Certification of their review, understanding and agreement to
comply with the City' s Investment Policy.
c) If a financial institution or securities broker or dealer wishes to enter
into a repurchase agreement with the city, the institution must sign a
Master Repurchase Agreement approved as to form and content by the
City Attorney' s Office .
d) The Financial Officer must conduct an annual review of the financial
condition of authorized financial institutions and securities brokers and
dealers .
e) Investment transactions must be executed with an authorized financial
institution or securities broker or dealer except in the following
circumstances :
i . Commercial paper, banker acceptances and guaranteed
investment contracts may be purchased and sold directly from
the issuer;
ii . Mutual funds and money market funds may be purchased, sold
and held directly with the funds;
iii . Investments in local government investment pools may be
transacted directly with the pool; and
iv. Bond refunding and lease escrow agreements will be executed
as provided in the bond and lease documents .
f) The Financial Officer will establish a safekeeping agreement with an
approved financial institution to act as a third party custodian.
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Investment securities will be held for the City by the custodian. When
applicable, the Financial Officer shall establish a separate securities
lending agreement with the custodian bank. The selection of the
City' s primary depository and primary custodian will be made through
the City' s competitive Request for Proposals process.
2 . Delivery versus Payment
All trades will be executed by delivery versus payment to ensure that securities
are deposited in an eligible financial institution prior to the release of funds.
Securities will be held by the City' s third-party custodian as evidenced by
safekeeping receipts.
3 . Internal Controls
The Financial Officer is responsible for establishing and maintaining an internal
control structure designed to provide reasonable assurance that the assets of the
city are protected from loss, theft or misuse .
VI. Suitable and Authorized Investments
As a home rule city, the City may adopt a list of acceptable investment
instruments differing from those outlined in CRS 24-75 -601 . 1 . Pursuant to Article
V of the City' s Charter the Council has adopted the following Ordinances and
Resolutions establishing the framework under which the Financial Officer must
conduct his duties : Ordinance 90, 1993 ; Ordinance 108 , 1988 , Resolution 85 - 134;
and Resolution 82-70 . Council may adopt additional Ordinances or Resolutions
that require modification of these investment tools .
1 . Eligible Investments
City funds may be invested in the following :
a) Any securities now or hereafter designed as legal investment for
municipalities in any applicable statute of the State of Colorado;
b) Interest-bearing accounts or time certificates of deposit, including
collateralized certificates of deposit and certificates of deposit through
the Account Registry Service, of financial institutions designated as
depositories for public moneys by the State of Colorado ;
c) United States Treasury obligations for which the full faith and credit of
the United States are pledged for payment of principal and interest.
Such securities will include but not be limited to : Treasury bills,
Treasury notes, Treasury bond and Treasury strips with maturities not
exceeding five years from the date of purchase ;
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d) Obligations issued by any United States government-sponsored agency
or instrumentality. Maturities may not exceed five years from the date
of purchase ;
e) Obligations issued by or on behalf of the City;
f) Obligations issued by or on behalf of any state of the United States,
political subdivision, agency, or instrumentality thereof. At the time
of purchase the obligation shall have an investment grade rating of not
less than AA- from Standard & Poor' s, Aa3 from Moody' s Investors
Service or AA- from Fitch Ratings Service;
g) Prime-rated bankers acceptances with a maturity not exceeding six
months from the date of purchase, issued by a state or national bank
which has a combined capital and surplus of at least 250 million
dollars, whose deposits are insured by the FDIC and whose senior
long-term debt is rated at the time of purchase at least AA- by
Standard and Poor' s, Aa3 by Moody' s Investors Service, or AA- by
Fitch Ratings Service ;
h) U. S . dollar denominated corporate notes or bank debentures .
Authorized corporate bonds shall be U. S . dollar denominated, and
limited to corporations organized and operated within the United
States with a net worth in excess of 250 million dollars . At the time of
purchase the debenture or corporate note shall have an investment
grade rating of not less than AA- from Standard & Poor' s, Aa3 from
Moody' s Investors Service or AA- from Fitch Ratings Service ;
i) Prime-rated commercial paper with a maturity not exceeding six
months issued by U. S . corporations. At the time of purchase the paper
shall be rated Al by Standard and Poor' s and PI by Moody' s Investors
Service. If the commercial paper issuer has senior debt outstanding,
the senior debt must be rated at the time of purchase at least AA- by
Standard and Poor' s or Aa3 by Moody' s Investors Service;
j ) Guaranteed investment contracts of domestically-regulated insurance
companies having a claims-paying ability rating of AA- or better from
Standard & Poor' s at the time of purchase;
k) Repurchase and reverse repurchase agreements. The structure of the
agreements (including margin ratios and collateralization) shall be
contained in the Master Repurchase Agreements . Repurchase
agreements shall include but are not limited to delivery-versus-
payment, tri-party and flexible repurchase agreements;
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1) Local government investment pools authorized under the laws of the
State of Colorado with a rating of AAAm; and
m) Money market mutual funds regulated by the Securities and Exchange
Commission and whose portfolios consist only of dollar denominated
securities.
2. Repurchase Agreements
a) Before any repurchase agreements shall be executed with an
authorized securities broker or dealer or financial institution, a Master
Repurchase Agreement approved as to form and content by the City
Attorney' s Office must be signed between the City and the securities
broker or dealer or financial institution.
b) The Financial Officer will maintain a file of all Master Repurchase
Agreements .
c) In addition to the straight forward repurchase agreement, wherein the
financial institution or securities broker or dealer delivers the collateral
versus payment to the City' s custodian for a fixed term at a fixed rate,
the City may enter into other types of repurchase agreements which
may include but not be limited to flexible repurchase agreements, tri-
party agreements and reverse repurchase agreements.
d) Repurchase agreements must be collateralized as provided in
individually executed Master Repurchase Agreements at a minimum
of 102 percent.
e) Zero coupon instruments will not be accepted as collateral .
f) The collateralized securities of the repurchase agreement can include
but are not limited to : U. S Treasuries, Collateralized Mortgage
Obligations or Agency securities .
VII. Investment Parameters
1 . Diversification and Asset Allocation
It is the intent of the City to diversify its investment portfolio . Investments shall
be diversified to eliminate the risk of loss resulting from over-concentration of
assets in a specific maturity, issuer or class of securities . Diversification
strategies and guidelines shall be determined and revised periodically by the
Financial Officer. The investments may be diversified by:
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a) Limiting investments to avoid over-concentration in securities from a
specific issuer or business sector (excluding U. S . Treasury securities) ;
b) Limiting investment in securities that have higher credit risks ;
c) Investing in securities with varying maturities ; and
d) Maintaining a portion of the portfolio in readily available funds such
as local government investment pools, money market funds or short
term repurchase agreements to ensure that City liquidity needs are met.
The maximum investment allowable for each investment category as a
percentage of the entire portfolio is as follows (excluding collateral for
repurchase agreements) :
CASH AND CASH EQUIVALENTS.................................................................... 100%
TREASURY SECURITIES .................................................................................... 90%
GOVERNMENT-SPONSORED AGENCY SECURITIES .................................. 90%
REPURCHASE AGREEMENTS .......................................................................... 70%
CORPORATE NOTES OR BONDS* ................................................................... 40%
BANK DEBENTURES* ......................................................................................... 25%
COMMERCIAL PAPER* ...................................................................................... 25%
BANKER' S ACCEPTANCES* .............................................................................. 25%
LOCAL GOVERNMENT INVESTMENT POOLS ............................................. 20%
MONEY MARKET FUNDS AND MUTUAL FUNDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15%
CD ACCOUNT REGISTRY SERVICE.....(MAXIMUM 50 MILLION) . . . . . . ...... 15%
CERTIFICATES OF DEPOSIT ............................................................................ 15%
GUARANTEED INVESTMENT CONTRACTS .................................................... 5%
* A maximum of 10 percent of the portfolio may be invested in any one
provider or issuer.
2. Investment Maturity and Liquidity
a) A portion of the portfolio should be continuously invested in readily
available funds such as local government investment pools, money
market funds, or short-term repurchase agreements to ensure that
appropriate liquidity is maintained to meet ongoing obligations . The
City must at all times maintain 5 percent of its operating investment
portfolio in instruments maturing in 120 days or less.
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b) Reserved funds may be invested in securities exceeding 5 years if the
maturities of such investments are made to coincide as closely as
possible with the expected use of funds .
c) The weighted average final maturity limitation of the total portfolio,
excluding pension funds and long-term reserve funds, will not exceed
3 years .
d) The City may collateralize repurchase agreements with longer-dated
investments, final maturity not to exceed 30 years .
VIII. Inter-agency Loan Program
1 . Purpose
The purpose of the Inter-agency loan program is to support City services,
missions, and values by making loans to outside entities such as the Urban
Renewal Authority and the Downtown Development Authority while
maintaining an adequate rate of return for the City.
2. Eligible Applicants
The following are examples of situations in which City loans to outside
agencies may be appropriate :
a) An entity that was created wholly or in part by the City and is in a
fledgling stage and does not yet have an established credit history to
access the capital markets. Examples include the Urban Renewal
Authority, etc .
b) An entity related to the City desires to issue debt that will be repaid
over a timeframe that would be unrealistic for a private lender.
Examples include bonds issued by the Downtown Development
Authority for less than 10 years.
c) Any other situation in which the Council deems it appropriate to meet
the financing needs of an entity that is engaged in services that support
the mission and values of the City.
3. Program Guidelines:
a) The borrowing entity must have approval from its governing body.
b) The loan must be evidenced by a promissory note.
c) There must be a reasonable probability of repayment of the loan from
an identifiable source such as TIF revenues.
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d) The interest rate assigned to the loan must be the higher of the
Treasury Note or Municipal Bond of similar duration (3 year, 5 year,
etc . ), plus 0. 5 %, subject to the following minimum (floor) .
FLOOR - Minimum Loan Rates
Term Rate
0 — 5 years 2 . 75 %
6 — 10 years 3 .25 %
11 — 15 years 3 . 75 %
16 — 25 years 4 . 00%
e) The loans must be limited to 25 years.
f) City Council must review the request and approve the amount and
terms and conditions of the loan.
g) Loans of Utility reserves must be reviewed by either the Energy Board
or Water Board in advance of City Council consideration, and must
meet the following additional criteria:
(i) the City Council must make a formal finding that the funds
will not be needed for utility purposes during the term of the
loan, and that the terms and conditions of the loan represent a
reasonable rate of return to the Utility; and
(ii) utility rates must not be increased for the purposes of funding
the loan.
4. Limit on Funds available for Loan Program
a) Governmental Funds : Total loans shall not exceed 25 % of the
aggregate cash and investments balance of the governmental funds
(i. e . , General Fund and Special Revenue Funds) .
b) Enterprise Funds : Total loans shall not exceed 5 % of the aggregate
cash and investments balance in the enterprise funds (i .e . Utility
Funds and Golf Fund) .
c) Operating and capital needs of the loaning funds shall not be
significantly impaired by these loans .
d) Loans should not impact the loaning funds compliance with minimum
fund balance policies, timing of intended uses, etc .
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IX. Reporting
1 . Methods
The Financial Officer will prepare an investment report on a quarterly basis . In
addition, a comprehensive investment report may be published on the City' s
website on an annual basis. All investment reports will be submitted in a timely
manner to the City Manager.
2. Performance Standards
The investment portfolio will be managed in accordance with the parameters
specified within this Investment Policy. The Financial Officer will establish a
benchmark yield for the City' s investments equal to the average yield on the
U. S . Treasury security which most closely corresponds to the portfolio ' s actual
weighted average maturity. In order to determine the actual rate of return on
any portion of the portfolio managed by an investment advisor, the Financial
Officer must include all of the advisor' s expenses and fees in the computation of
the rate of return.
3. Marking to Market
The market value of the portfolio will be calculated at least quarterly and a
statement of the market value will be included in the quarterly investment
report.
X. Policy Adoption
This Investment Policy will be reviewed at least every two years by the Investment
Committee, City Manager and the Financial Officer and may be amended by Council
as conditions warrant. The Investment Policy may be adopted by Resolution of the
Council .
Prepared by: Date :
Effective Date :
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Appendix A : Listing of Authorized Personnel
(Separation of Duties)
This information is available at the City of Fort Collins Finance Department.
Appendix Be Authorized Financial Institutions
This information is available at the City of Fort Collins Finance Department.
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Appendix C : Glossary of Investment Terms
Agency : A bond, issued by a U. S . government-sponsored agency. The offerings of these
agencies are backed by the U. S . government, but not guaranteed by the government since
the agencies are private entities . Such agencies have been set up in order to allow certain
groups of people to access low cost financing, especially students and first-time home
buyers . Some prominent issuers of agency bonds are Student Loan Marketing
Association (Sallie Mae), Federal National Mortgage Association (Fannie Mae) and
Federal Home Loan Mortgage Corporation (Freddie Mac) . Agency bonds are usually
exempt from state and local taxes, but not federal tax.
Average Life : The length of time that will pass before one-half of a debt obligation has
been retired.
Bankers ' Acceptance : A short-term credit investment which is created by a non-
financial firm and whose payment is guaranteed by a bank. Often used in importing and
exporting, and as a money market fund investment.
Benchmark: A comparative base for measuring the performance or risk tolerance of the
investment portfolio . A benchmark should represent a close correlation to the level of
risk and the average duration of the portfolio ' s investments.
Book Value : The value at which a security is carried on the inventory lists or other
financial records of an investor. The book value may differ significantly from the
security' s current value in the market.
Broker : An individual who brings buyers and sellers together for a commission.
Cash Sale/Purchase : A transaction which calls for delivery and payment of securities
on the same day that the transaction is initiated.
Certificate of Deposit (CD) : A time deposit with a specific maturity evidenced by a
certificate .
Collateralization : Process by which a borrower pledges securities, property, or other
deposits for the purpose of securing the repayment of a loan and/or security.
Commercial Paper: An unsecured short-term promissory note issued by corporations,
with maturities ranging from 2 to 270 days .
Coupon Rate : The annual rate of interest received by an investor from the issuer of
certain types of fixed-income securities . Also know as the "interest rate".
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Credit Quality : The measurement of the financial strength of a bond issuer. This
measurement helps an investor to understand an issuer' s ability to make timely interest
payments and repay the loan principal upon maturity. Generally, the higher the credit
quality of a bond issuer, the lower the interest rate paid by the issuer because the risk of
default is lower. Credit quality ratings are provided by nationally recognized rating
agencies .
Credit Risk: The risk to an investor that an issuer will default on the payment of interest
and/or principal on a security.
Current Yield (Current Return) : A yield calculation determined by dividing the
annual interest received on a security by the current market price of that security.
Debenture : A bond secured only by the general credit of the issuer.
Delivery versus Payment (DVP) : A type of securities transaction in which the
purchaser pays for the securities when they are delivered either to the purchaser or to
their custodian.
Diversification : A process of investing assets among a range of security types by sector,
maturity, and quality rating.
Duration : A measure of the timing of the cash flows, such as the interest payments and
the principal repayment, to be received from a given fixed-income security. This
calculation is based on three variables : term to maturity, coupon rate and yield to
maturity. The duration of a security is a useful indicator of its price volatility for given
changes in interest rates .
Federal Deposit Insurance Corporation (FDIC) : A federal agency that insures
deposits in member banks and thrifts up to $ 100,000 ($250,000 through 12/31 /2013 ) .
Federal Funds : Funds placed in Federal Reserve banks by depository institutions in
excess of current reserve requirements. These depository institutions may lend fed funds
to each other overnight or on a longer basis. They may also transfer funds among each
other on a same-day basis through the Federal Reserve banking system. Fed funds are
considered to be immediately available funds .
Federal Funds Rate : The interest rate that banks charge each other for the use of
Federal funds .
Government Securities : An obligation of the U. S . government, backed by the full faith
and credit of the government. These securities are regarded as the highest quality of
investment securities available in the U. S . securities market.
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Green Investments : Mutual funds that are considered "ethical investments ." These
funds screen companies to ensure that they have sound environmental practices such as :
maintaining or improving the environment, industrial relations, racial equality,
community involvement, education, training, healthcare and various other environmental
criteria. Negative screens include but are not limited to : alcohol, gambling, tobacco,
irresponsible marketing, armaments, pornography, and animal rights .
Interest Rate Risk: The risk associated with declines or rises in interest rates which
cause an investment in a fixed-income security to increase or decrease in value .
Investment-grade Obligations : An investment instrument suitable for purchase by
institutional investors under the prudent person rule . Investment-grade is restricted to
those obligations rated BBB or higher by a rating agency.
Liquidity : An asset that can be converted easily and quickly into cash without a
substantial loss of value.
Local Government Investment Pool (LGIP) : An investment by local governments in
which their money is pooled as a method for managing local funds.
Mark-to-Market: the process whereby the book value or collateral value of a security is
adjusted to reflect its current market value.
Market Value : Current market price of a security.
Master Repurchase Agreement : A written contract covering all future transactions
between the parties to repurchase and reverse repurchase. Establishes each party' s rights
in the transaction.
Maturity : the date on which payment of a financial obligation is due. The final state
maturity is the date on which the issuer must retire a bond and pay the face value to the
bondholder.
Money Market Mutual Fund : Mutual funds that invest solely in money market
instruments (short-term debt instruments, such as Treasury bills, commercial paper,
bankers ' acceptances, repurchase agreements, and federal funds) .
Mutual Fund: An investment company that pools money and can invest in a variety of
securities, including fixed-income securities and money market instruments . Mutual
funds are regulated by the investment company Act of 1940 and must abide by the
Securities and Exchange Commission (SEC) disclosure guidelines .
National Association of Securities Dealers (NASD) : A self-regulatory organization of
brokers and dealers in the over-the-counter securities business. Its regulatory mandate
includes authority over firms that distribute mutual fund shares as well as other securities.
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Net Asset Value : The market value of one share of an investment company, such as a
mutual fund. This figure is calculated by totaling a fund' s assets which includes
securities, cash, and any accrued earnings, subtracting this from the fund' s liabilities and
dividing this total by the number of shares outstanding. This is calculated once a day
based on the closing price for each security in the fund' s portfolio.
No Load Fund : A mutual fund which does not levy a sales charge on the purchase of its
shares.
Portfolio : Collection of securities held by an investor.
Primary Dealer : A group of government securities dealers who submit daily reports of
market activity and positions and monthly financial statements to the Federal Reserve
Bank of New York and are subject to its informal oversight.
Real Estate Investment Trust (REIT) : A company that buys, develops, manages and
sells real estate assets . Allows participants to invest in a professionally managed
portfolio of real-estate properties. The main function is to pass profits on to investors;
business activities are generally restricted to generation of property rental income .
Repurchase Agreement (Repo) : An agreement of one party to sell securities at a
specified price to a second party and a simultaneous agreement of the first party to
repurchase the securities at a specified price or at a specified later date.
Reverse Repurchase Agreement: An agreement of one party to purchase securities at a
specified price from a second party and a simultaneous agreement of the first party to
resell the securities at a specified price to the second party on demand or at a specified
date.
Rule 2a-7 of the Investment Company Act : Applies to all money market mutual funds
and mandates such funds to maintain certain standards, including a 13 -month maturity
limit and a 90-day average maturity on investments, to help maintain a constant net asset
value of one dollar ($ 1 . 00) .
Securities and Exchange Commission (SEC) : Agency created by Congress to protect
investors in securities transactions by administering securities legislation.
Total Return : The sum of all investment income plus changes in the capital value of the
portfolio . For mutual funds, return on an investment is composed of share price
appreciation plus any realized dividends or capital gains . This is calculated by taking the
following components during a certain time period. (Price Appreciation) + (Dividends
Paid) + (Capital Gains) = Total Return
Treasury Bills : Short-term U. S . government non-interest bearing debt securities with
maturities of no longer than one year.
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Treasury Bonds : Long-term U. S . government debt securities with maturities of more
than ten years . Currently, the longest outstanding maturity is 30 years.
Treasury Notes : Intermediate U. S . government debt securities with maturities of two to
ten years .
Tri-party Repurchase Agreement : In a "normal repurchase" transaction there are two
parties, the buyer and the seller. A tri-party repurchase agreement adds a custodian as the
third party to act as an impartial entity to the repurchase transaction to administer the
agreement and to relieve the buyer and seller of many administrative details.
Weighted Average Maturity (WAM) : The average maturity of all the securities that
comprise a portfolio .
Yield: The current rate of return on an investment security. Generally expressed as a
percentage of the security' s current price .
Yield Curve : A graphical representation that depicts the relationship at a given point in
time between yields and maturity for bonds that are identical in every way except
maturity. A normal yield curve may be alternatively referred to as a positive yield curve .
Yield-to-Maturity : The rate of return yielded by a debt security held to maturity when
both interest payments and the investor' s potential capital gain or loss are included in the
calculation of return.
Zero-Coupon Securities : A security that is issued at a discount and makes no periodic
interest payments. The rate of return consists of a gradual accretion of the principal of
the security and is payable at par upon maturity.
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