Fort Walton Beach Ordinance — 1894--Investment Policy-surplus funds — reading text

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. Ordinance 1875, Adopted January 8, 2013 Page 13 of25  City of Fort Walton Beach, FL INVESTMENT POLICY 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. 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. Broker/Dealer. A person or firm transacting securities business with customers. A " broker" acts as an agent beiween 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 Notes/ Bonds. 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, the right to redeem the securities prior to maturity at a predetermined price and time. Capital Preservation. An investment strategy where the primary goal is to preserve capital and prevent loss in a portfolio. Capture. A statistical measure of an investment manager' s overall performance in up- markets. The up- market capture ratio is used to evaluate how well an investment manager performed relative to an index during periods when that index has risen. The down- market capture ratio is used to evaluate how well or poorly an investment manager performed relative to an index during periods when that index has dropped. 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. Collateralization. Process by which a borrower pledges securities, property, or other deposits for securing the repayment of a loan and/ or security. Ordinance 1875, Adopted January 8, 2013 Page 14 of 25  City of Fort Walton Beach, FL INVESTMENT POLICY 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 of 270 days, and given a short- term debt rating by one or more NRSROs. Convexity. A measure of a bond' s price sensitivity to changing interest rates. A high convexity indicates greater sensitivity of a bond's price to interest rate changes. 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. Dealer. A dealer, as opposed to a broker, acts as a principal in all transactions, buying and selling for his own account. 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. Derivatives. For hedging purposes, common derivatives are options, futures, swaps and swaptions. All Collateralized Mortgage Obligations ( " CMOs ") are derivatives. ( 1) Financial instruments whose return profile is linked to, or derived from, the movement of one or more underlying index or security, and may include a leveraging factor, or ( 2) financial contracts based upon notional amounts whose value is derived from an underlying index or security ( interest rates, foreign exchange rates, equities or commodities). Derivative Security. Financial instrument created from, or whose value depends upon, one or more underlying assets or indexes of asset values. 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. Re- openings 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 Ordinance 1875, Adopted January 8, 2013 Page 15 of 25  City of Fort Walton Beach, FL INVESTMENT POLICY 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 of 95 %2, would have a principal cost of $955 per $ 1, 000 of face 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 primarily for settlement of U. S. Treasury and Federal Agency securities. Fed. See " Federal