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Amortized Cost: cost of investments adjusted for amortized premiums and discounts. Amortized cost is used to maintain comparability with market value.
Arbitrage Regulation: law to control the use of profit making by purchasing securities on one market for immediate resale on another in order to profit from a price difference.
Bankers Acceptances: investment vehicle created to facilitate international commercial trade transactions. The bank accepts responsibility to repay a loan to the holder of the investment vehicle created in a commercial transaction. The credit worthiness of Bankers Acceptances are enhanced because they are secured by the issuing bank, the goods themselves, and the importer. Bankers Acceptances are sold on a discounted basis.
Bond Indenture: written agreement specifying the terms and conditions for issuing bonds, stating the form of the bond being offered for sale, interest to be paid, the maturity date, call provisions and protective covenants, if any, collateral pledged, the repayment schedule, and other terms. It describes the legal obligations of a bond issuer and the powers of the bond trustee, who has the responsibility for ensuring that interest payments are made to registered bondholders.
Bookvalue: a term synonymous with amortized cost.
Buy and Hold Strategy: investments in which management has the positive intent and ability to hold each issue until maturity.
Collateralization: to secure a debt in part or in full by pledge of collateral, asset pledged as security to ensure payment or performance of an obligation.
Commercial Paper: short-term IOU, or unsecured money market obligation, issued by prime rated commercial firms and financial companies, with maturities from 2 days up to 270 days. A promissory note of the issuer used to finance current obligations, and is a negotiable instrument.
Delivery Versus Payment: securities industry term indicating payment is due when the buyer has securities in hand or a book entry receipt.
Embedded Option: a statement within the bond structure that would alter the interest rate earned by the bond.
Interest-Only Strips: mortgage backed instrument where investor receives only the interest, no principal, from a pool of mortgages. Issues are highly interest rate sensitive. Cash flows vary between interest periods. As well, the maturity date may occur earlier than that stated if all loans within the pool are pre-paid. High prepayments on underlying mortgages can return less to the holder that the dollar amount invested.
Inverse Floater: a bond or note that does not earn a fixed rate of interest. Rather, the interest rate that is earned is tied to a specific interest-rate index identified in the bond/note structure. The interest rate earned by the bond/note will move in the opposite direction of the index, e.g., if market interest rates as measured by the selected index rises, the interest rate earned by the bond/note will decline. An inverse floater increases the market rate risk and modified duration of the investment.
Laddered Portfolio: bond investment portfolio with securities in each maturity range (e.g. monthly) over a specified period of time (e.g. five years).
Leverage: investing with borrowed money with the expectation that the interest earned on the investment will exceed the interest paid on the borrowed money.
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Local Agency Investment Fund (LAIF): a voluntary investment program offering participating agencies the opportunity to participate in a major portfolio which daily invests hundreds of millions of dollars, using the investment expertise of the State Treasurer's Office Investment staff at no additional cost to the taxpayer. Investment in LAIF, considered a short term investment, is readily available for cash withdrawal on a daily basis.
Market Risk: the risk that market interest rates will rise causing a loss of value in investments held. All investments made by the City involve a degree of market risk. See also "Unrealized Gains (Losses).
Modified Duration: a measure of the sensitivity that the value of a fixed-income security has to changes in market rates of interest. Modified duration is the best single measure of a portfolio's or security's exposure to market risk. Modified duration identifies the potential gain/loss in value before the gain/loss actually occurs. It is a prospective measurement, e.g., a modified duration of 1.5 indicates that when and if a 1% change in market interest rates occurs, a 1.5% change in the value of a security will result. Investments with modified durations of one to three are considered to be relatively conservative.
Negotiable Certificates of Deposit: large denomination ($100,000 or more) interest bearing time deposits, paying the holder a fixed amount of interest at maturity. Issues can be sold to a new owner before maturity.
Nominee Name: registered owner of a stock or bond if different from the beneficial owner, who acts as holder of record for securities and other assets. Typically, this arrangement is done to facilitate the transfer of securities when it is inconvenient to obtain the signature of the real owner, or the actual owner may not wish to be identified. Nominee ownership simplifies the registration and transfer of securities.
Pooled Investment: grouping of resources for the common advantage of the participants.
Range Note: investment whose coupon payment varies (e.g. either 7% or 3%) and is dependent on whether the current benchmark (e.g. 30 year Treasury) falls within a pre-determined range (e.g. between 6.75% and 7.25%).
Repurchase Agreement: contract to purchase and subsequently sell securities at a specified date and price.
Sweep Account: short-term income fund into which all uninvested cash balances from the non-interest bearing checking account are automatically transferred on a daily basis.
Third-Party Custodian: corporate agent, usually a commercial bank, who, acting as trustee, holds securities under a written agreement for a corporate client and buys and sells securities when instructed. Custody services include securities safekeeping, and collection of dividends and interest. The bank acts only as a transfer agent and makes no buy-sell recommendations.
Time Certificates of Deposit: deposit account paying interest for a fixed term, with the understanding that funds cannot be withdrawn before maturity without giving advance notice.
Unrealized Gains (Losses): increases (decreases) in the value of investments representing the difference between the amortized cost of the investments and their current market value. Increases (decreases) in value are caused primarily by changes in market interest rates subsequent to purchasing the investments. Increases (decreases) in value indicate two things: 1. The portfolio has a potential gain (loss) in principal if the securities are sold, and 2. The portfolio is overperforming (underperforming) the current market for similar investments. An increase in value indicates the portfolio is earning relatively more interest than current market conditions, and a decrease in value indicates that the portfolio is earning relatively less interest than current market conditions.
Zero Accrual Periods: a period of time in which an investment accumulates no interest.
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