Resolution 114-2003
RESOLUTION NO.
114 -2003
County Clerk
A RESOLUTION OF THE BOARD OF COUNTY COMMISSIONERS OF
MONROE COUNTY, FLORIDA ADOPTING A NEW AND REPEAUN6 AN OLD
INVESTMENT POUCY FOR MONROE COUNTY
WHEREAS, Chapter 218, Part IV, Florida Statutes, requires a unit of local government to
adopt, maintain, and comply with an investment policy for public funds in excess of the amounts
needed to meet current expenses; and
WHEREAS, the BOCC adopted Resolution No. 227-1997 approving an investment policy; and
WHEREAS, segments of the investment policy adopted in 1997 require revision to conform
with changes to the Florida Statutes; and
WHEREAS, it is desired to establish a more comprehensive investment policy; now,
therefore
BE IT RESOLVED BY THE BOARD OF COUNTY COMMISSIONERS OF MONROE
COUNTY, FLORIDA that:
Section 1. The Monroe County Investment Policy adopted by Resolution No. 227-1997
is hereby repealed.
Section 2. Investment Policy, Monroe County Board of County Commissioners,
attached hereto and incorporated herein by reference is hereby adopted as the County's
Investment Policy.
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Mayor Spehar
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/~~"Pro Tem Nelson
c aom~~6!~ner McCoy
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. - Issioner Rice
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Deputy Clerk
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PASSED AND ADOPTED by the Board of County Commissioners of Monro~~ty,~lori~,
at a regular meeting of said Board held on the 19th day of March, 2003. r;,l;r,: ~ ."
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BOARD OF COUNTY COMMISSIONERS
OFMO~#N)}j.O~
By
Mayor/Chairperson
INVESTMENT POLICY
MONROE COUNTY
BOARD OF COUNTY COMMISSIONERS
Approved: 3/19 . 2003
T ABLE OF CONTENTS
Page
I. PURPOSE 3
II. SCOPE 3
III. DEFINITIONS 3
IV. INVESTMENT OBJECTIVES 4
V, MANAGEMENT OF INVESTMENTS 5
VI. STANDARDS OF PRUDENCE 5
VII, ETHICS AND CONFLICTS OF INTEREST 6
VIII. INTERNAL CONTROLS AND INVESTMENT PROCEDURES 6
IX. CONTINUING EDUCATION 7
X. AUTHORIZED INVESTMENT INSTITUTIONS AND DEALERS 7
XI. MATURITY AND LIQUIDITY REQUIREMENTS 7
XII. COMPETITIVE SELECTION OF INVESTMENT INSTRUMENTS 8
XIII. AUTHORIZED INVESTMENTS AND PORTFOLIO COMPOSITION 8
XIV. PROHIBITED INVESTMENTS 11
XV. PERFORMANCE MEASUREMENTS 11
XVI. REPORTING 12
XVII, THIRD-PARTY CUSTODIAL AGREEMENTS 12
XVIII. INVESTMENT POLICY ADOPTION 13
A TT ACHMENT:
Glossary of Cash and Investment Management Terms
Monroe County
Investment Policy
Page 2
Investment Policy
Monroe County, Florida
Board of County Commissioners
I. PURPOSE
Section 218.415, Florida Statutes, authorizes a unit of local government to invest its funds pursuant to
a written investment plan adopted by the governing body, and pursuant to Article VIII, s. 1 of the
Florida Constitution, the "clerk of the circuit court shall be ex officio clerk of the board of county
commissioners, auditor, recorder and custodian of all county funds." It furthers the public interest of
the County to invest any monies not immediately required to be disbursed and to maximize the net
earnings on such funds and it is the intent and desire of the Board to authorize investments that shall
provide a high rate of return without compromising the safety of such funds.
Therefore, the purpose of this Investment Policy ("Policy") is to set forth the investment objectives
and parameters for the management of public funds of the Monroe County Board of County
Commissioners. This Policy is designed to safeguard funds on behalf of the County, to assure the
availability of operating and capital funds when needed, and provide an investment return competitive
with comparable funds and financial market indices.
II. SCOPE
In accordance with Section 218.415, Florida Statutes, this Policy applies to all cash and investments
held or controlled by the Clerk on behalf of the County. This Policy does not apply to pension funds
or funds related to the issuance of debt where there are other existing policies or indentures in effect
for such funds, Additionally, any future revenues, which have statutory investment requirements
conflicting with this Policy and funds held or controlled by Federal or State agencies (e.g" Department
of Revenue), are not subject to the provisions of this Policy. The Clerk will consolidate cash balances
from the appropriate funds into a pool in order to maximize investment earnings, Investment income
will be allocated to the various funds based on their respective participation and in accordance with
generally accepted accounting principles.
III. DEFINITIONS
For purposes of this Policy, the following terms shall have the following meanings:
"Board" means the Board of County Commissioners of Monroe County, Florida.
"Clerk" or "Clerk of the Circuit Court" means the Clerk of the Circuit Court and Ex
Officio Clerk to the Board of County Commissioners of Monroe County or any duly
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Investment Policy
Page 3
authorized designee who has been so designated in writing by the Clerk of the Circuit
Court.
"Core portfolio" means long term investments that are held primarily as reserves.
"County" means Monroe County, a political subdivision of the State of Florida.
"Investment Advisor" means an advisor or firm registered under the Investment Advisor's Act
of 1940 and selected by the Clerk.
"Investment Officials" means any authorized designee of the Clerk.
"Moody's" means Moody's Investors Service, a global credit rating, research and risk analysis
firm, publishing credit opinions, research and ratings on fixed income securities, issuers of
securities and other credit obligations,
"Short term portfolio" means investment of cash that is needed for operating purposes
within a twelve-month period.
"Standard and Poor's" means Standard and Poor's Corp., an independent bond rating
service, which measures the probability of the timely payment of principal and
interest.
"Third Party Custodian" means any financial institution which shall lawfully act as a
depository chartered by the Federal Government, the State of Florida, or any other
state or territory of the United States which has a branch or principal place of
business in the State of Florida as defined in Section 658.12, Florida Statutes, or by a
national association organized and existing under the laws of the United States which
is authorized to accept and execute trusts and which is doing business in the State of
Florida.
IV. INVESTMENT OBJECTIVES
The objectives of this Policy are as follows:
A. Safety of Principal
The foremost objective of this investment program is the safety of the principal of
funds. Investment transactions shall seek to keep capital losses at a minimum, whether
they are from securities defaults or erosion of market value. To attain this objective,
investments will be diversified to the extent practicable to control the risk of loss
resulting from over concentration of assets in a specific maturity, issuer (credit risk),
instrument, dealer, or financial institution in order that potential losses on individual
securities do not exceed the income generated from the remainder of the portfolio.
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Investment Policy
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From time to time, securities may be traded for other similar securities to improve
yields, adjust maturity or reduce credit risk. For these transactions, a loss may be
incurred for accounting purposes, provided any of the following occurs with respect to
the replacement security.
1. The yield has been increased
11, Maturity has been favorably adjusted
111. Quality of the investment has been improved
B, Maintenance of Liquidity
In order to reduce interest rate risk on the market value of the portfolios, funds shall be
managed such that they are available to meet reasonably anticipated cash flow
requirements, Periodic cash flow analyses shall be completed in order to ensure that
the funds are positioned to provide sufficient liquidity.
C, Return on Investment
Investment portfolios shall be designed with the objective of attaining a market rate of
return throughout budgetary and economic cycles, taking into account the investment
risk constraints and liquidity needs. Return on investment is of least importance
compared to the safety and liquidity objectives described above. The core of
investments is limited to relatively low risk securities in anticipation of earning a fair
return relative to the risk being assumed.
V. MANAGEMENT OF INVESTMENTS
The Clerk shall oversee the day-to-day management of County investments, The Clerk shall be
responsible for the transferring of appropriate funds to affect investment transactions consistent with
this Policy, Should the Clerk elect to select an investment advisor, such advisor or firm must be
registered under the Investment Advisor's Act of 1940,
VI. STANDARDS OF PRUDENCE
The standard of prudence to be used by Investment Officials shall be the "Prudent Person" standard
and shall be applied in the context of managing the overall investment program, Investment officials,
acting in accordance with written procedures and this investment policy and exercising due diligence,
shall be relieved of personal responsibility for an individual security's credit risk or market price
changes, provided deviations from expectation are reported to the Clerk in a timely fashion and the
liquidity and the sales of securities are carried out in accordance with the terms of this policy. The
Prudent Person standard states the following:
Investments shall be made with judgment and care, under circumstances then
prevailing, which persons of prudence, discretion and intelligence exercise in the
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Investment Policy
Page 5
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 from
the investment.
While the standard of prudence to be used by Investment Officials who are officers or employees is
the Prudent Person standard, any person or firm hired or retained to invest, monitor, or advise
concerning these assets shall be held to the higher standard of "Prudent Expert." This is a revised
version of the Prudent Person standard required by ERISA to guide managers of pension and profit
sharing portfolios, The main addition is that the Investment Advisor must act as someone with
familiarity with matters relating to the management of money, not just prudence. The standard is as
follows:
In investing and reinvesting moneys and in acqumng, retammg, managing, and
disposing of investments of these funds, the person or firm shall exercise the judgment,
care, skill, prudence, and diligence under the circumstances then prevailing, which
persons of prudence, discretion, and intelligence, acting in a like capacity and familiar
with such matters would use in the conduct of an enterprise of like character and with
like aims by diversifying the investments of the funds, so as to minimize the risk,
considering the probable income as well as the probable safety of their capital.
VII. ETHICS AND CONFLICTS OF INTEREST
Investment Officials 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
decisions. Also, Investment Officials shall disclose to the Clerk any material financial interests in
Qualified Institutions that conduct business with the Clerk or the County, and they shall further
disclose any material personal financial/investment positions that could be related to the performance
of the County's investment program,
VIII. INTERNAL CONTROLS AND INVESTMENT PROCEDURES
The Clerk of the Circuit Court, as Chief Financial Officer, shall establish a system of investment
internal control and operational procedures that are in writing and made a part of the operational
procedures. The investment internal controls shall be designed to prevent losses of funds, which
might arise from fraud, employee error, and misrepresentation by third parties, or imprudent actions
by employees, The written procedures shall include reference to safekeeping, separation of
transaction authority from accounting and record keeping, wire transfer agreements, banking service
contracts, collateral/depository agreements, and delivery-vs-payment procedures, No person shall
engage in an investment transaction except as authorized under the terms of this policy.
Independent auditors, as a normal part of the annual financial audit to the County, shall conduct a
review of the system of investment internal controls to ensure compliance with policies and
procedures.
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Investment Policy
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IX, CONTINUING EDUCATION
One Investment Official shall annually complete eight (8) hours of continuing education in subjects or
course of study related to investment practices and products.
X. AUTHORIZED INVESTMENT INSTITUTIONS AND DEALERS
Investment institutions and dealers authorized are as follows:
A. Banks qualified as Public Depositories by the Treasurer of the State of Florida, III
accordance with Chapter 280, Florida Statutes
B. Institutions designated as "Primary Securities Dealers" by the Federal Reserve Bank of
New York
C. Regional dealers that qualify under Securities and Exchange Commission Rule 15 C3-1
(uniform net capital rule),
XI. MATURITY AND LIQUIDITY REQUIREMENTS
To the extent possible, an attempt shall be made to match investment maturities with known cash
needs and anticipated cash flow requirements,
A. Maturity Guidelines
Securities purchased shall have a final maturity of five (5) years or less from the date of
purchase, The overall weighted average duration of the entire portfolio shall be less
than two (2) years.
B. Liquidity Requirements
The Clerk shall determine the approximate amount of funds required to meet the day-
to-day expenditure needs of the County. All balances in the depository bank shall be
maintained in an interest-bearing account. In order to have an available source of funds
to meet unexpected cash requirements, a minimum ofthree-month's operating expenses
shall be invested with the Florida Local Government Surplus Funds Trust Fund
("SBA"), an authorized money market fund or other short-term alternatives, The
balance of the County's funds shall be available for investment according to the
guidelines incorporated within this Policy.
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Investment Policy
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XII. COMPETITIVE SELECTION OF INVESTMENT INSTRUMENTS
After the Clerk has determined the approximate maturity date based on cash flow needs and market
conditions and has analyzed and selected one or more optimal types of investments, a minimum of
three (3) Qualified Institutions must be contacted and asked to provide bids/offers on the securities in
question. Pursuant to Section 119.07(3)(m), Florida Statutes, bids shall be held in confidence until the
bid deemed to best meet the investment objectives is determined and selected. The Clerk shall utilize
the competitive bid process to select the securities to be purchased or sold. However, if obtaining
bids/offers are not feasible and appropriate, securities may be purchased/sold utilizing the comparison
to current market price method on an exception basis, Selection by comparison to a current market
price shall only be utilized when, in the judgment of the Clerk, competitive bidding would inhibit the
selection process. The Investment Advisor will provide the Clerk with a written explanation of the
purpose of using the comparison to a current market price method.
A. Examples of when this method may be used include:
1. When time constraints due to unusual circumstances preclude the use of the
competitive bidding process,
11. When no active market exists for the issue being traded due to the age or depth
of the issue,
111. When a security is unique to a single dealer, for example, a private placement,
or
IV. When the transaction involves new Issues or Issues III the "when issued"
market.
B, Acceptable current market price providers include, but are not limited to the following:
1. Telerate Information System,
11. Bloomberg Information Systems,
111. Wall Street Journal or a comparable nationally recognized financial publication
providing daily market pricing, and
IV. Daily market pricing provided by the County's custodian or its correspondent
institution,
XIII. AUTHORIZED INVESTMENTS AND PORTFOLIO COMPOSITION
Investments should be made subject to cash flow needs and subject to revisions as market conditions
and County needs change. However, when the invested funds are needed in whole or in part for the
purpose originally intended or for more optimal investments, the Clerk may sell the investment at the
then-prevailing market price and place the proceeds into the proper account at the County's financial
institution.
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Investment Policy
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The following are the investment requirements and allocation limits on security types, issuers, and
maturities as established by the County. Diversification strategies within the established guidelines
shall be reviewed and revised periodically as necessary by Clerk.
The Clerk shall have the option to further restrict investment percentages from time to time based on
market conditions, risk and diversification investment strategies, The percentage allocation
requirements for investment types and issuers are calculated based on the original cost of each
investment.
A. The Florida Local Government Surplus Funds Trust Fund ("SBA")
A maximum of 1 00% of available funds may be invested in The Florida Local
Government Surplus Funds Trust Fund.
B. United States Government Securities
Negotiable direct obligations, or obligations the principal and interest of
which are unconditionally guaranteed by the United States Government.
A maximum of 100% of available funds may be invested in United States
Government Securities with the exception of Treasury Strips, which are limited
to 10% of available funds,
The maximum length to maturity of any direct investment in the United States
Government Securities is five (5) years from the date of purchase.
C. United States Government Agencies
Bonds, debentures, notes, callables and fixed rate mortgage-backed securities
issued or guaranteed by United States Government Agencies, provided such
obligations are backed by the full faith and credit of the United States.
A maximum of 50% of available funds may be invested in United States
Government Agencies.
A maximum of 10% of available funds may be invested in any individual United
States Government Agencies,
The maximum length to maturity for an investment in any United States
Government Agency security is five (5) years from the date of purchase.
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Investment Policy
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D, Federal Instrumentalities (United States Government-sponsored agencies)
Senior obligations, which include bonds, debentures, notes, callables and fixed
rate mortgage-backed securities issued or guaranteed by United States
government-sponsored agencies (Federal Instrumentalities), These are limited
to the following:
Federal Farm Credit Bank (FFCB)
Federal Home Loan Bank or its County banks (FHLB)
Federal National Mortgage Association (FNMA)
Federal Home Loan Mortgage Corporation (Freddie-Macs) including Federal -
Home Loan Mortgage Corporation participation certificates
A maximum of 80% of available funds may be invested m Federal
Instrumentalities.
A maximum of 30% of available funds may be invested in anyone issuer and a
maximum of 25% of available funds may be invested in callable securities,
The maximum length to maturity for an investment in any Federal Instrumentality
security is five (5) years from the date of purchase.
E. Interest-bearing Time Deposit or Saving Accounts
Nonnegotiable interest-bearing time certificates of deposit or savings accounts in
financial institutions organized under the laws of this state and/or in national
financial institutions organized under the laws of the United States and doing
business and situated in the State of Florida, provided that any such deposits are
secured by the Florida Security for Public Deposits Act, Chapter 280, Florida
Statutes. Additionally, the financial institution shall not be listed with any
recognized credit watch information service.
A maximum of 10% of available funds may be invested in nonnegotiable interest-
bearing time certificates of deposit.
A maximum of 10% of available funds may be deposited with anyone issuer,
The maximum maturity on any certificate shall be no greater than one (1) year
from the date of purchase,
F. Registered Investment Companies (Money Market Mutual Funds)
Shares in open-end and no-load Money Market Mutual Funds provided such
funds are registered under the Federal Investment Company Act of 1940 and
operate in accordance with 17 C.F.R. 270.2a-7, which stipulates that money
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Investment Policy
Page 10
market funds must have an average weighted maturity of 90 days or less. In
addition, the share value ofthe money market funds must equal to $1.00.
A maximum of 20% of available funds may be invested in money market mutual
funds. A maximum of 10% of available funds may be invested with anyone
money market fund.
The money market mutual funds shall be rated AAAm or AAAm-G or better by
Standard & Poor's, or the equivalent by another nationally recognized rating
agency.
A thorough review of any money market mutual fund is required prior to
investing, and on a continual basis. There shall be a questionnaire developed by
the Investment Advisor that shall contain a list of questions that cover the major
aspects of any investment pool/fund,
G. Intergovernmental Investment Pool
Intergovernmental Investment Pools that are authorized pursuant to the Florida
Interlocal Cooperation Act, as provided in Section 163.01, Florida Statutes.
A maximum of 10% of available funds may be invested in intergovernmental
investment pools,
A thorough review of any investment pool/fund is required prior to investing, and
on a continual basis, There shall be a questionnaire developed by the Investment
Advisor that shall contain a list of questions that cover the major aspects of any
investment pool/fund.
XIV. PROHIBITED INVESTMENTS
Investment Officials or Investment Advisor may not invest in investment products that include
the use of derivatives or reverse repurchase agreements and securities lending transactions are
not permitted by this Policy. A "derivative" is defined as a financial instrument the value of
which depends on, or is derived from, the value of one or more underlying assets or index or
asset values, Investments not listed in this Policy are prohibited.
XV. PERFORMANCE MEASUREMENTS
In order to assist in the evaluation of the portfolios performance, the Clerk shall use performance
benchmarks for short-term and core portfolios. The use of benchmarks shall allow the County to
measure its returns against other investors in the same markets,
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The short-term investment portfolio shall be designed with the annual objective of exceeding the
weighted average return (net book value rate of return) of the Florida Local Government Surplus
Funds Trust Fund.
The core investment portfolio, as determined by a cash flow analysis, shall be designed with the
annual objective of exceeding the return of the Merrill Lynch 1-3 Year Treasury Index compared to
the portfolio's total rate of return, which includes all realized and unrealized gains and losses. The
Merrill Lynch 1-3 Year Treasury Index represents all D.S, Treasury securities maturing over one year,
but less than three years. This maturity range is an appropriate benchmark based on the objectives of
the County.
XVI. REPORTING
The Clerk and the Investment Advisor shall prepare periodic reports at least annually for the Board
that shall include securities in the portfolio by class or type, income earned, market value and a
comparison of the portfolios' asset allocation positions to the policy's asset allocation requirements as
of the reporting date.
The annual report shall provide all, but not limited to, the following: a complete list of all invested
funds, name or type of security in which the funds are invested, the amount invested, the maturity
date, earned income, the book value, the market value and the yield on each investment. The annual
report shall show performance on both a book value and total rate of return basis and shall compare
the results to the above-stated performance benchmarks. All investments shall be reported pursuant to
Statements issued by the Governmental Accounting Standards Board,
XVII. THIRD-PARTY CUSTODIAL AGREEMENTS
Securities shall be held with a third party custodian and should be properly designated as an asset of
the County. The securities must be held in an account separate and apart from the assets of the
financial institution. The custodian shall accept transaction instructions only from those persons who
have been duly authorized by Clerk and which authorization has been provided, in writing, to the
custodian. No withdrawal of securities, in whole or in part, shall be made from safekeeping or
permitted unless by a duly authorized person.
Monthly, the custodian shall provide the Clerk with detailed information on the securities held by the
custodian, Security transactions between a broker/dealer and the custodian involving the purchase or
sale of securities by transfer of money or securities must be made on a delivery vs, payment basis, if
applicable, to ensure that the custodian shall have the security or money, as appropriate, in hand at the
conclusion of the transaction. Only after receiving written authorization from an Investment Official
shall authorized securities be delivered. Securities held as collateral shall be held free and clear of any
liens.
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XVIII. INVESTMENT POLICY ADOPTION
The Clerk shall review the Policy annually and make recommendations to the Board for modification
thereto,
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Monroe County
The Chairman of the Board of Monroe County,
Florida
By:
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Date: oj -/ q... 0.3
The Clerk of the Circuit Court of Monroe County,
Florida
By:a~t J,..J1~ D.C..
Date: 03 --19- "3
Investment Policy
Page 13
GLOSSARY OF KEY INVESTMENT TERMS
Accrued Interest. Interest earned but which has not yet been paid or received,
Agency. See "Federal Agency Securities."
Ask Price. Price at which a broker/dealer offers to sell a security to an investor. Also known as "offered price."
Asset Backed Securities (ABS). A fixed-income security backed by notes or receivables against assets other than real
estate. Generally issued by special purpose companies that "own" the assets and issue the ABS. Examples include securities
backed by auto loans, credit card receivables, home equity loans, manufactured housing loans, farm equipment loans and
aircraft leases.
Bankers' Acceptance (BA's). A draft or bill of exchange drawn upon and accepted by a bank. Frequently used to finance
shipping of international goods. Used as a short-term credit instrument, bankers' acceptances are traded at a discount from
face value as a money market instrument in the secondary market on the basis of the credit quality of the guaranteeing bank,
Basis Point. One hundredth of one percent, or 0,01%. Thus 1 % equals 100 basis points,
Bearer Security. A security whose ownership is determined by the holder of the physical security, Typically, there is no
registration on the issuer's books. Title to bearer securities is transferred by delivery of the physical security or certificate.
Also know as "physical securities."
Benchmark Bills: In November 1999, FNMA introduced its Benchmark Bills program, a short-term debt securities issuance
program to supplement its existing discount note program. The program includes a schedule of larger, weekly issues in three-
and sixth-month maturities and biweekly issues in one-year for Benchmark Bills, Each issue is brought to market via a
Dutch (single price) auction, FNMA conducts a weekly auction for each Benchmark Bill maturity and accepts both
competitive and non-competitive bids through a web based auction system. This program is in addition to the variety of
other discount note maturities, with rates posted on a daily basis, which FNMA offers. FNMA's Benchmark Bills are
unsecured general obligations that are issued in book-entry form through the Federal Reserve Banks. There are no periodic
payments of interest on Benchmark Bills, which are sold at a discount from the principal amount and payable at par at
maturity, Issues under the Benchmark program constitute the same credit standing as other FNMA discount notes; they
simply add organization and liquidity to the short-term Agency discount note market.
Benchmark Notes/Bonds: Benchmark Notes and Bonds are a series of FNMA "bullet" maturities (non-callable) issued
according to a pre-announced calendar. Under its Benchmark NoteslBonds program, 2, 3, 5, 10 and 3D-year maturities are
issued each quarter. Each Benchmark Notes new issue has a minimum size of $4 billion, 3D-year new issues having a
minimum size of $1 billion, with reopenings based on investor demand to further enhance liquidity. The amount of non-
callable issuance has allowed FNMA to build a yield curve in Benchmark Notes and Bonds in maturities ranging from 2 to
30 years. The liquidity emanating from these large size issues has facilitated favorable financing opportunities through the
development of a liquid overnight and term repo market. Issues under the Benchmark program constitute the same credit
standing as other FNMA issues; they simply add organization and liquidity to the intermediate- and long-term Agency
market.
Benchmark. A market index used as a comparative basis for measuring the performance of an investment portfolio, A
performance benchmark should represent a close correlation to investment guidelines, risk tolerance and duration of the
actual portfolio's investments.
Bid Price. Price at which a broker/dealer offers to purchase a security from an investor.
Bond Market Association (BMA). The bond market trade association representing the largest securities markets in the
world. In addition to publishing a Master Repurchase Agreement, widely accepted as the industry standard document for
Repurchase Agreements, the BMA also recommends bond market closures and early closes due to holidays,
Bond. Financial obligation for which the issuer promises to pay the bondholder (the purchaser or owner of the bond) a
specified stream of future cash flows, including periodic interest payments and a principal repayment.
11
Book Entry Securities. Securities that are recorded in a customer's account electronically through one of the financial
markets electronic delivery and custody systems, such as the Fed Securities wire, DTC and PTC (as opposed to bearer or
physical securities), The trend is toward a certificate-free society in order to cut down on paperwork and to diminish
investors' concerns about the certificates themselves. The vast majority of securities are now book entry securities.
Book Value. The value at which a debt security is reflected on the holder's records at any point in time. Book value is also
called "amortized cost" as it represents the original cost of an investment adjusted for amortization of premium or accretion
of discount. Also called "carrying value." Book value can vary over time as an investment approaches maturity and differs
from "market value" in that it is not affected by changes in market interest rates.
BrokerfDealer. A person or firm transacting securities business with customers, A "broker" acts as an agent between
buyers and sellers, and receives a commission for these services. A "dealer" buys and sells financial assets from its own
portfolio. A dealer takes risk by owning inventory of securities, whereas a broker merely matches up buyers and sellers. See
also "Primary Dealer."
Bullet NoteslBonds. Notes or bonds that have a single maturity date and are non-callable,
Call Date. Date at which a call option may be or is exercised.
Call Option. The right, but not the obligation, of an issuer of a security to redeem a security at a specified value and at a
specified date or dates prior to its stated maturity date. Most fixed-income calls are a par, but can be at any previously
established price, Securities issued with a call provision typically carry a higher yield than similar securities issued without a
call feature. There are three primary types of call options (1) European - one-time calls, (2) Bermudan - periodically on a
predetermined schedule (quarterly, semi-annual, annual), and (3) American - continuously callable at any time on or after the
call date. There is usually a notice period of at least 5 business days prior to a call date.
Callable Bonds/Notes. Securities, which contain an imbedded call option giving the issuer, has the right to redeem the
securities prior to maturity at a predetermined price and time.
Certificate of Deposit (CD). Bank obligation issued by a financial institution generally offering a fixed rate of return
(coupon) for a specified period of time (maturity). Can be as long as 10 years to maturity, but most CDs purchased by public
agencies are one year and under.
Collateral. Investment securities or other property that a borrower pledges to secure repayment of a loan, secure deposits of
public monies, or provide security for a repurchase agreement.
Collateralized Mortgage Obligation (CMO). A security that pools together mortgages and separates them into short,
medium, and long-term positions (called tranches). Tranches are set up to pay different rates of interest depending upon their
maturity, Interest payments are usually paid monthly. In "plain vanilla" CMOs, principal is not paid on a tranche until all
shorter tranches have been paid off. This system provides interest and principal in a more predictable manner. A single pool
of mortgages can be carved up into numerous tranches each with its own payment and risk characteristics,
Commercial Paper. Short term unsecured promissory note issued by a company or financial institution, Issued at a
discount and matures for par or face value. Usually a maximum maturity of270 days, and given a short-term debt rating by
one or more NRSROs.
Corporate Note. A debt instrument issued by a corporation with a maturity of greater than one year and less than ten years.
Counterparty. The other party in a two party financial transaction. "Counterparty risk" refers to the risk that the other party
to a transaction will fail in its related obligations. For example, the bank or broker/dealer in a repurchase agreement.
Coupon Rate. Annual rate of interest on a debt security, expressed as a percentage of the bond's face value.
Current Yield. Annual rate of return on a bond based on its price, Calculated as (coupon rate / price), but does not
accurately reflect a bond's true yield level.
Custody. Safekeeping services offered by a bank, financial institution or trust company, referred to as the "custodian."
Service normally includes the holding and reporting of the customer's securities, the collection and disbursement of income,
securities settlement and market values,
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Delivery Versus Payment (DVP). Settlement procedure in which securities are delivered versus payment of cash, but only
after cash has been received. Most security transactions, including those through the Fed Securities Wire system and DTC,
are done DVP as a protection for both the buyer and seller of securities,
Depository Trust Company (DTC). A fIrm through which members can use a computer to arrange for securities to be
delivered to other members without physical delivery of certifIcates. A member of the Federal Reserve System and owned
mostly by the New York Stock Exchange, the Depository Trust Company uses computerized debit and credit entries. Most
corporate securities, commercial paper, CDs and BAs clear through DTC.
Derivative. A fInancial instrument whose value is based on or determined by another security, fInancial instrument or index.
Designated Bond. FFCB's regularly issued, liquid, non-callable securities that generally have a 2 or 3 year original
maturity. New issues of Designated Bonds are $1 billion or larger. Reopenings of existing Designated Bond issues are
generally a minimum of $100 million. Designated Bonds are offered through a syndicate of two to six dealers. Twice each
month the Funding Corporation announces its intention to issue a new Designated Bond, reopen an existing issue, or to not
issue or reopen a Designated Bond. Issues under the Designated Bond program constitute the same credit standing as other
FFCB issues; they simply add organization and liquidity to the intermediate- and long-term Agency market.
Discount Notes. Unsecured general obligations issued by Federal Agencies at a discount. Discount notes mature at par and
can range in maturity from overnight to one year. Very large primary (new issue) and secondary markets.
Discount Rate. Rate charged by the system of Federal Reserve Banks on overnight loans to member banks. Changes to this
rate are administered by the Federal Reserve and closely mirror changes to the "fed funds rate,"
Discount Securities. Non-interest bearing money market instruments that are issued at discount and redeemed at maturity
for full face value. Examples include U.S Treasury Bills, Federal Agency Discount Notes, Bankers' Acceptances and
Commercial Paper,
Discount. The amount by which a bond or other fInancial instrument sells below its face value. See also "Premium."
Diversification. Dividing investment funds among a variety of security types, maturities, industries and issuers offering
potentially independent returns,
Dollar Price. A bond's cost expressed as a percentage of its face value. For example, a bond quoted at a dollar price of95
Yz, would have a principal cost of$955 per $1,000 offace value,
Duff & Phelps. One of several NRSROs that provide credit ratings on corporate and bank debt issues,
Duration. The weighted average maturity of a security's or portfolio's cash flows, where the present values of the cash
flows serve as the weights. The greater the duration of a security/portfolio, the greater its percentage price volatility with
respect to changes in interest rates. Used as a measure of risk and a key tool for managing a portfolio versus a benchmark
and for hedging risk, There are also different kinds of duration used for different purposes (e.g. MacAuley Duration,
ModifIed Duration).
Fannie Mae. See "Federal National Mortgage Association."
Fed Money Wire. A computerized communications system that connects the Federal Reserve System with its member
banks, certain U. S. Treasury offIces, and the Washington D.C. offIce of the Commodity Credit Corporation, The Fed Money
Wire is the book entry system used to transfer cash balances between banks for themselves and for customer accounts.
Fed Securities Wire. A computerized communications system that facilitates book entry transfer of securities between
banks, brokers and customer accounts. Used primary for settlement of U.S. Treasury and Federal Agency securities.
Fed. See "Federal Reserve System,"
Federal Agency Security. A debt instrument issued by one of the federal agencies, Federal agencies are considered second
in credit quality and liquidity only to U.S. Treasuries.
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Federal Agency. Government sponsored/owned entity created by the U,S, Congress, generally for the purpose of acting as a
financial intermediary by borrowing in the marketplace and directing proceeds to specific areas of the economy considered to
otherwise have restricted access to credit markets. The largest Federal Agencies are GNMA, FNMA, FHLMC, FHLB,
FFCB, SLMA, and TV A,
Federal Deposit Insurance Corporation (FDIC). Federal agency that insures deposits at commercial banks, currently to a
limit of$100,000 per depositor per bank,
Federal Farm Credit Bank (FFCB). One of the large Federal Agencies. A Government Sponsored Enterprise (GS) system
that is a network of cooperatively-owned lending institutions that provides credit services to farmers, agricultural
cooperatives and rural utilities. The FFCBs act as financial intermediaries that borrow money in the capital markets and use
the proceeds to make loans and provide other assistance to farmers and farm-affiliated businesses. Consists of the
consolidated operations of the Banks for Cooperatives, Federal Intermediate Credit Banks, and Federal Land Banks.
Frequent issuer of discount notes, agency notes and callable agency securities. FFCB debt is not an obligation of, nor is it
guaranteed by the U.S. government, although it is considered to have minimal credit risk due to its importance to the U,S.
financial system and agricultural industry. Also issues notes under its "designated note" program.
Federal Funds (Fed Funds). Funds placed in Federal Reserve Banks by depository institutions in excess of current reserve
requirements, and frequently loaned or borrowed on an overnight basis between depository institutions.
Federal Funds Rate (Fed Funds Rate). The interest rate charged by a depository institution lending Federal Funds to
another depository institution. The Federal Reserve influences this rate by establishing a "target" Fed Funds rate associated
with the Fed's management of monetary policy.
Federal Home Loan Bank System (FHLB). One of the large Federal Agencies. A Government Sponsored Enterprise
(GSE) system, consisting of wholesale banks (currently twelve district banks) owned by their member banks, which provides
correspondent banking services and credit to various financial institutions, financed by the issuance of securities. The
principal purpose of the FHLB is to add liquidity to the mortgage markets. Although FHLB does not directly fund
mortgages, it provides a stable supply of credit to thrift institutions that make new mortgage loans. FHLB debt is not an
obligation of, nor is it guaranteed by the U.S. government, although it is considered to have minimal credit risk due to its
importance to the U.S, financial system and housing market. Frequent issuer of discount notes, agency notes and callable
agency securities. Also issues notes under its "global note" and "TAP" programs,
Federal Home Loan Mortgage Corporation (FHLMC or "Freddie Mac"). One of the large Federal Agencies. A
government sponsored public corporation (GSE) that provides stability and assistance to the secondary market for home
mortgages by purchasing first mortgages and participation interests financed by the sale of debt and guaranteed mortgage
backed securities. FHLMC debt is not an obligation of, nor is it guaranteed by the U.S, government, although it is considered
to have minimal credit risk due to its importance to the U.S. financial system and housing market. Frequent issuer of
discount notes, agency notes, callable agency securities and MBS. Also issues notes under its "reference note" program.
Federal National Mortgage Association (FNMA or "Fannie Mae"). One of the large Federal Agencies. A government
sponsored public corporation (GSE) that provides liquidity to the residential mortgage market by purchasing mortgage loans
from lenders, financed by the issuance of debt securities and MBS (pools of mortgages packaged together as a security).
FNMA debt is not an obligation of, nor is it guaranteed by the U.S, government, although it is considered to have minimal
credit risk due to its importance to the U.S. financial system and housing market. Frequent issuer of discount notes, agency
notes, callable agency securities and MBS. Also issues notes under its "benchmark note" program.
Federal Reserve Bank. One of the 12 distinct banks of the Federal Reserve System.
Federal Reserve System (the Fed). The independent central bank system of the United States that establishes and conducts
the nation's monetary policy. This is accomplished in three major ways: (1) raising or lowering bank reserve requirements,
(2) raising or lowering the target Fed Funds Rate and Discount Rate, and (3) in open market operations by buying and selling
government securities. The Federal Reserve System is made up of twelve Federal Reserve District Banks, their branches,
and many national and state banks throughout the nation. It is headed by the seven member Board of Governors known as
the "Federal Reserve Board" and headed by its Chairman,
Fiscal AgentJPaying Agent. A bank or trust company that acts, under a trust agreement with a corporation or municipality,
in the capacity of general treasurer. The agent performs such duties as making coupon payments, paying rents, redeeming
bonds, and handling taxes relating to the issuance of bonds.
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Fitch Investors Service, Inc. One of several NRSROs that provide credit ratings on corporate and municipal debt issues.
Floating Rate Security (FRN or "floater"). A bond with an interest rate that is adjusted according to changes in an interest
rate or index. Differs from variable-rate debt in that the changes to the rate take place immediately when the index changes,
rather on a predetermined schedule. See also "Variable Rate Security."
Freddie Mac. See "Federal Home Loan Mortgage Corporation",
Ginnie Mae. See "Government National Mortgage Association".
Global Notes: Notes designed to qualify for immediate trading in both the domestic U.S. capital market and in foreign
markets around the globe. Usually large issues that are sold to investors worldwide and therefore have excellent liquidity.
Despite their global sales, global notes sold in the U.S, top U.S. investors are typically denominated in U.S, dollars,
Government National Mortgage Association (GNMA or "Ginnie Mae"). One of the large Federal Agencies,
Government-owned Federal Agency that acquires, packages, and resells mortgages and mortgage purchase commitments in
the form of mortgage-backed securities. Largest issuer of mortgage pass-through securities. GNMA debt is guaranteed by
the full faith and credit of the U,S, government (one of the few agencies that is actually full faith and credit of the U.S.).
Government Sponsored Enterprise (GSE). Privately owned entity subject to federal regulation and supervision, created by
the U,S. Congress to reduce the cost of capital for certain borrowing sectors of the economy such as students, farmers, and
homeowners. GSEs carry the implicit backing of the U.S. Government, but they are not direct obligations of the U.S.
Government. For this reason, these securities will offer a yield premium over Treasuries. Some consider GSEs to be stealth
recipients of corporate welfare. Examples ofGSEs include: FHLB, FHLMC, FNMA and SLMA.
Government Sponsored Enterprise Security. A security issued by a Government Sponsored Enterprise. Considered
Federal Agency Securities.
Index. A compilation of statistical data that tracks changes in the economy or in financial markets,
Interest-Only (10) STRIP. A security based solely on the interest payments from the bond, After the principal has been
repaid, interest payments stop and the value of the security falls to nothing. Therefore, IOs are considered risky investments.
Usually associated with mortgage-backed securities.
Inverse Floater. A floating rate security structured in such a way that it reacts inversely to the direction of interest rates.
Considered risky as their value moves in the opposite direction of normal fixed-income investments and whose interest rate
can fall to zero.
Investment Advisor. A company that provides professional advice managing portfolios, investment recommendations
and/or research in exchange for a management fee.
Investment Grade. Bonds considered suitable for preservation of invested capital; bonds rated a minimum of Baa3 by
Moody's, BBB- by Standard & Poor's, or BBB- by Fitch. Although "BBB" rated bonds are considered investment grade,
most public agencies cannot invest in securities rated below "A."
Liquidity. Relative ease of converting an asset into cash without significant loss of value. Also, a relative measure of cash
and near-cash items in a portfolio of assets. Also, a term describing the marketability of a money market security correlating
to the narrowness of the spread between the bid and ask prices.
Market Value. The fair market value of a security or commodity. The price at which a willing buyer and seller would pay
for a security.
Mark-to-market. Adjusting the value of an asset to its market value, reflecting in the process unrealized gains or losses.
Master Repurchase Agreement. A widely accepted standard agreement form published by the Bond Market Association
(BMA) that is used to govern and document Repurchase Agreements and protect the interest of parties in a repo transaction.
Maturity Date. Date on which principal payment of a financial obligation is to be paid.
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Medium Term Notes (MTN's). Used frequently to refer to corporate notes of medium maturity (5-years and under).
Technically, any debt security issued by a corporate or depository institution with a maturities from 1 to 10 years and issued
under an MTN shelfregistration. Usually issued in smaller issues with varying coupons and maturities, and underwritten by
a variety of broker/dealers (as opposed to large corporate deals issued and underwritten all at once in large size and with a
fixed coupon and maturity).
Money Market Mutual Fund (MMF). A type of mutual fund that invests solely in money market instruments, such as
Treasury bills, commercial paper, bankers' acceptances, and repurchase agreements, Money market mutual funds are
registered with the SEC under the Investment Company Act of 1940 and are subject "rule 2a- 7" which significantly limits
average maturity and credit quality of holdings. MMF's are managed to maintain a stable net asset value (NA V) of $1.00.
Many MMFs carry ratings by a NRSRO.
Moody's Investors Service. One of several NRSROs that provide credit ratings on corporate and municipal debt issues.
Mortgage Backed Securities (MBS). Mortgage-backed securities represent an ownership interest in a pool of mortgage
loans made by financial institutions, such as savings and loans, commercial banks, or mortgage companies, to finance the
borrower's purchase of a home or other real estate. The majority of MBS are issued and/or guaranteed by GNMA, FNMA
and FHLMC. There are a variety of MBS structures, some of which can be very risky and complicated. All MBS have
reinvestment risk as actual principal and interest payments are dependent on the payment of the underlying mortgages which
can be prepaid by mortgage holders to refmance and lower rates or simply because the underlying property was sold,
Mortgage Pass-Through Securities. A pool of residential mortgage loans with the monthly interest and principal
distributed to investors on a pro-rata basis. Largest issuer is GNMA.
Municipal Note/Bond. A debt instrument issued by a state or local government unit or public agency. The vast majority of
municipals are exempt from state and federal income tax, although some non-qualified issues are taxable,
Mutual Fund. Portfolio of securities professionally managed by a registered investment company that issues shares to
investors. Many different types of mutual funds exist (bond, equity, money fund); all except money market funds operate on
a variable net asset value (NA V).
National Association of Securities Dealers (NASD). Organization of brokers and dealers who trade securities in the United
States, supervised by the SEC, and which provides regulatory exams for industry participants.
Negotiable Certificate of Deposit (Negotiable CD). Large denomination CDs ($100,000 and larger) that are issued in
bearer form and can be traded in the secondary market.
NRSRO. A "Nationally Recognized Statistical Rating Organization," A designated rating organization that the SEC has
deemed a strong national presence in the U.S. NRSROs provide credit ratings on corporate and bank. debt issues, Only
ratings ofa NRSRO may be used for the regulatory purposes of rating. Includes Moody's, S&P, Fitch and Duff & Phelps.
Offered Price. See also "Ask Price."
Open Market Operations. Federal Reserve monetary policy tactic entailing the purchase or sale of government securities in
the open market by the Federal Reserve System from and to primary dealers in order to influence the money supply, credit
conditions, and interest rates,
Par Value. Face value, stated value or maturity value of a security.
Physical Delivery. Delivery of readily available underlying assets at contract maturity.
Portfolio. Collection of securities and investments held by an investor.
Premium. The amount by which a bond or other financial instrument sells above its face value, See also "Discount."
Primary Dealer. Any of a group of designated government securities dealers designated by to the Federal Reserve Bank of
New York. Primary dealers can buy and sell government securities directly with the Fed. Primary dealers also submit daily
reports of market activity and security positions held to the Fed and are subject to its informal oversight. Primary dealers are
considered the largest players in the U.S, Treasury securities market.
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Prime Paper. Commercial paper of high quality, Highest rated paper is A-l+/A-l by S&P and P-l by Moody's.
Principal. Face value of a financial instrument on which interest accrues, May be less than par value if some principal has
been repaid or retired, For a transaction, principal is par value times price and includes any premium or discount.
Prudent Investor Standard. Standard that requires that when investing, reinvesting, purchasing, acquiring, exchanging,
selling, or managing public funds, a trustee shall act with care, skill, prudence, and diligence under the circumstances then
prevailing, including, but not limited to, the general economic conditions and the anticipated needs of the agency, that a
prudent person 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. More stringent than
the "prudent person" standard as it implies a level of knowledge commensurate with the responsibility at hand,
Range Note. A type of structured note that accrues interest daily at a set coupon rate that is tied to an index. Most range
notes have two coupon levels; a higher accrual rate for the period the index is within a designated range, the lower accrual
rate for the period that the index falls outside the designated range. This lower rate may be zero and may result in zero
earnmgs.
Rate of Return. Amount of income received from an investment, expressed as a percentage of the amount invested.
Realized Gains (Losses). The difference between the sale price of an investment and its book value. Gains/losses are
"realized" when the security is actual sold, as compared to "unrealized" gains/losses which are based on current market
value. See "Unrealized Gains (Losses),"
Reference Bills: FHLMC's short-term debt program created to supplement its existing discount note program by offering
issues from one month through one year, auctioned on a weekly or on an alternating four-week basis (depending upon
maturity) offered in sizeable volumes ($1 billion and up) on a cycle of regular, standardized issuance, Globally sponsored
and distributed, Reference Bill issues are intended to encourage active trading and market-making and facilitate the
development of a term repo market. The program was designed to offer predictable supply, pricing transparency and
liquidity, thereby providing alternatives to Treasury bills, FHLMC's Reference Bills are unsecured general corporate
obligations, This program supplements the corporation's existing discount note program. Issues under the Reference
program constitute the same credit standing as other FHLMC discount notes; they simply add organization and liquidity to
the short-term Agency discount note market.
Reference Notes: FHLMC's intermediate-term debt program with issuances of 2, 3, 5, 10 and 30-year maturities. Initial
issuances range from $2 - $6 billion with reopenings ranging $1 - $4 billion, The notes are high-quality bullet structures
securities that pay interest semiannually. Issues under the Reference program constitute the same credit standing as other
FHLMC notes; they simply add organization and liquidity to the intermediate- and long-term Agency market.
Repurchase Agreement (Repo). A short-term investment vehicle where an investor agrees to buy securities from a
counterparty and simultaneously agrees to resell the securities back to the counterparty at an agreed upon time and for an
agreed upon price. The difference between the purchase price and the sale price represents interest earned on the agreement.
In effect, it represents a collateralized loan to the investor, where the securities are the collateral. Can be DVP, where
securities are delivered to the investor's custodial bank, or "tri-party" where the securities are delivered to a third party
intermediary. Any type of security can be used as "collateral," but only some types provide the investor with special
bankruptcy protection under the law. Repos should be undertaken only when an appropriate BMA approved master
repurchase agreement is in place,
Reverse Repurchase Agreement (Reverse Repo). A repo from the point of view of the original seller of securities, Used
by dealers to finance their inventory of securities by essentially borrowing at short-term rates, Can also be used to leverage a
portfolio and in this sense, can be considered risky if used improperly.
Safekeeping. Service offered for a fee, usually by financial institutions, for the holding of securities and other valuables.
Safekeeping is a component of custody services,
Sallie Mae. See "Student Loan Marketing Association,"
Secondary Market. Markets for the purchase and sale of any previously issued financial instrument.
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Securities Lending. An arrangement between and investor and a custody bank that allows the custody bank to "loan" the
investors investment holdings, reinvest the proceeds in permitted investments, and shares any profits with the investor.
Should be governed by a securities lending agreement. Can increase the risk of a portfolio in that the investor takes on the
default risk on the reinvestment at the discretion of the custodian.
Sinking Fund. A separate accumulation of cash or investments (including earnings on investments) in a fund in accordance
with the terms of a trust agreement or indenture, funded by periodic deposits by the issuer (or other entity responsible for debt
service), for the purpose of assuring timely availability of moneys for payment of debt service, Usually used in connection
with term bonds.
Spread. The difference between the price of a security and similar maturity Treasury investments, expressed in percentage
terms or basis points, A spread can also be the absolute difference in yield between two securities, The securities can be in
different markets or within the same securities market between different credits, sectors, or other relevant factors.
Standard & Poor's. One of several NRSROs that provide credit ratings on corporate and municipal debt issues.
STRIPS (Separate Trading of Registered Interest and Principal of Securities). Acronym applied to Treasury securities
that have had their coupons and principal repayments separated into individual zero-coupon Treasury securities, The same
technique and "strips" description can be applied to non-Treasury securities (e.g, FNMA strips).
Structured Notes. Notes that have imbedded into their structure options such as step-up coupons or derivative-based
returns.
Student Loan Marketing Association (SLMA or "Sallie Mae"). One of the large Federal Agencies, A federally-charted
public corporation (GSE) created to provide liquidity and a secondary market for lenders for loans to students and
educational institutions. In 1997, SLMA initiated a process of unwinding its status as a GSE; however, until the process is
complete, all debt issued will be considered GSE debt until maturity. SLMA debt is not an obligation of, nor is it guaranteed
by the U.S. government, although it is considered to have minimal credit risk due to its importance to the U,S. financial
system and education sector. Frequent issuer of discount notes, agency notes and callable agency securities. Also issues
notes under its "global note" program.
TAP Notes: Federal Agency notes issued under the FHLB TAP program, Launched in 6/99 as a refinement to the FHLB
bullet bond auction process, In a break from the FHLB' s traditional practice of bringing numerous small issues to market
with similar maturities, the TAP Issue Program uses the four most common maturities and reopens them up regularly through
a competitive auction. These maturities (2,3,5 and 10 year) will remain open for the calendar quarter, after which they will
be closed and a new series of TAP issues will be opened to replace them. This reduces the number of separate bullet bonds
issued, but generates enhanced awareness and liquidity in the marketplace through increased issue size and secondary market
volume.
Tennessee Valley Authority (TV A). One of the large Federal Agencies. A wholly owned corporation of the United States
government that was established in 1933 to develop the resources of the Tennessee Valley region in order to strengthen the
regional and national economy and the national defense. Power operations are separated from non-power operations. TV A
securities represent obligations of TV A, payable solely from TV A's net power proceeds, and are neither obligations of nor
guaranteed by the United States. TV A is currently authorized to issue debt up to $30 billion. Under this authorization, TV A
may also obtain advances from the Treasury of up to $150 million. Frequent issuer of discount notes, agency notes and
callable agency securities.
Total Return. Investment performance measured over a period of time that includes coupon interest, interest on interest, and
both realized and unrealized gains or losses. Total return includes, therefore, any market value appreciation/depreciation on
investments held at period end.
Treasuries. Collective term used to describe debt instruments backed by the U.S. Government and issued through the U.S.
Department of the Treasury. Includes Treasury bills, Treasury notes, and Treasury bonds. Also a benchmark term used as a
basis by which the yields of non- Treasury securities are compared (e.g" "trading at 50 basis points over Treasuries").
Treasury Bills (T-Bills). Short-term direct obligations of the United States Government issued with an original term of one
year or less. Treasury bills are sold at a discount from face value and do not pay interest before maturity, The difference
between the purchase price of the bill and the maturity value is the interest earned on the bill. Currently, the U,S. Treasury
issues 4-week, 13-week and 26-week T-Bills
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Treasury Bonds. Long-term interest-bearing debt securities backed by the U.S. Government and issued with maturities of
ten years and longer by the u.s. Department ofthe Treasury, The Treasury stopped issuing Treasury Bonds in August 2001.
Treasury Notes. Intermediate interest-bearing debt securities backed by the U.s. Government and issued with maturities
ranging from one to ten years by the U.S, Department of the Treasury. The Treasury currently issues 2-year, 5-year and 10-
year Treasury Notes,
Trustee. A bank designated by an issuer of securities as the custodian of funds and official representative of bondholders.
Trustees are appointed to insure compliance with the bond documents and to represent bondholders in enforcing their
contract with the issuer,
Uniform Net Capital Rule. SEC regulation 15C3-1 that outlines the minimum net capital ratio (ratio of indebtedness to net
liquid capital) of member firms and non-member broker/dealers.
Unrealized Gains (Losses). The difference between the market value of an investment and its book value. Gains/losses are
"realized" when the security is actual sold, as compared to "unrealized" gains/losses which are based on current market
value. See also "Realized Gains (Losses)."
Variable-Rate Security. A bond that bears interest at a rate that varies over time based on a specified schedule of
adjustment (e.g., daily, weekly, monthly, semi-annually or annually). See also "Floating Rate Note."
Weighted Average Maturity (or just "Average Maturity"). The average maturity of all securities and investments of a
portfolio, determined by multiplying the par or principal value of each security or investment by its maturity (days or years),
summing the products, and dividing the sum by the total principal value of the portfolio, A simple measure of risk ofa fixed-
income portfolio.
Weighted Average Maturity to Call. The average maturity of all securities and investments of a portfolio, adjusted to
substitute the first call date per security for maturity date for those securities with call provisions.
Yield Curve. A graphic depiction of yields on like securities in relation to remaining maturities spread over a time line. The
traditional yield curve depicts yields on Treasuries, although yield curves exist for Federal Agencies and various credit
quality corporates as well. Yield curves can be positively sloped (normal) where longer-term investments have higher yields,
or "inverted" (uncommon) where longer-term investments have lower yields than shorter ones.
Yield to Call (YTC). Same as "Yield to Maturity," except the return is measured to the first call date rather than the
maturity date. Yield to call and be significantly higher or lower than a security's yield to maturity.
Yield to Maturity (YTM). Calculated return on an investment, assuming all cash flows from the security are reinvested at
the same original yield. Can be higher or lower than the coupon rate depending on market rates and whether the security was
purchased at a premium or discount. There are different conventions for calculating YTM for various types of securities.
Yield. There are numerous methods of yield determination. In this glossary, see also "Current Yield," "Yield Curve," "Yield
to Call" and "Yield to Maturity."
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