Smart Investing Strategies For the Newer Smaller Public Ohio .ppt by longze569

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									  Main Steps

1. Setting investment objectives
2. Establishing investment policy
3. Selecting a portfolio strategy
4. Selecting assets
5. Measuring and evaluating risk and
  General Objective
• S.L.Y. - Safety, Liquidity, Yield
• Don’t purchase anything you don’t
• Keep investments simple
• Prudent Care
• Due Diligence
Policy Statement

It is the policy of the City of X ("the City") to
deposit and invest public funds in a manner which
will provide the highest investment return with the
maximum security while meeting the daily cash
flow demands of the City and conforming to all
state and local statutes governing the investment
of public funds.
Prudent Investor Rule

“Investments shall be made with judgment and care
 under circumstances then prevailing which persons
 of prudence, discretion, and intelligence exercise in
 the management of their own affairs, not for
 speculation, but for investment, considering the
 probable safety of their capital as well as the
 probable income to be derived.”
Due Diligence

 FINRA Background Check on all brokers and dealers
  you do business with.
 Check compliance with capital requirements and
  audited financials
 Check registrations and licensing
 Evidence of adequate insurance coverage
 Acknowledgement and understanding of policy
 Check references
 Ask your auditors what else you might need
Due Diligence

 WWW.FINRA.ORG              FINRA – formerly NASD
      Investor Information
      FINRA Broker Check
      Look up Broker / Dealer firm or Individual
           Search by Name
           Search by CRD #
     Advisor Check

These sites will give you background information about compliance with the
NASD & SEC. It also provides additional investor information on protecting the
 Portfolio Components
• Short-Term Portfolio – Provide liquidity for short-term
  cash needs
    State Pool
    U.S. Treasury Bills
    Federal Discount Notes
    Commercial Paper
    Certificates of Deposit

• Core Portfolio – Funds not expected to be spent
    United States Treasury Notes
    Federal Agency Securities/Mortgage Backed Securities
    Corporate Notes
    Portfolio Components

   Income (average coupon)
   Yield (call or maturity)
   Duration
   Maturity
   Sector Allocation
 Types of Risk

 Credit Risk or Default Risk
 This is the risk that an issuer will be unable to pay the
 contractual interest or principal on its debt obligations.

 Interest Rate Risk
 A rise in interest rates during the term of your debt securities
 hurts the market value or pricing. (aka. Market Risk)

 Reinvestment Risk
 The risk that future proceeds will have to be reinvested at a
 lower potential interest rate.
U.S. Treasuries

 Full Faith & Credit of U.S. Government
 T-Bills <1 year
      Discount, actual / 360 basis no coupon mature at Par
 T-Notes 1-10 year
 T-Bills 10-30 year, Notes and Bills
       Pay semi annual interest, actual/actual basis
 Highly liquid secondary market
Certificate of Deposits
Issued by Banks

 FDIC insured to $100k ($250k until 12/31/2009)
 Physical CD’s – (aka - Direct Deposit)
 CDARS - Certificate of Deposit Account Registry Service
 Negotiable CD’s – (aka - Brokered CDs, DTC Eligible CDs)
Physical CDs
Definition: Deposits (Time or CDs) safekept at a depository
held in the name of the investing entity
 Advantages                      Disadvantages
 •   Largest Number of Issuers   • Early Withdrawal Penalties
 •   Flexible Maturities         • Auto Rolls
 •   Flexible Settlements        • Method of Interest Disbursement
 •   Competitive Yields          • May or May not have Placement
 •   FDIC Insured                  Fees
 •   Early Withdrawal Option

Availability/Transaction Process: Readily available; Bank specific
transaction requirements; Broker/Dealer or Direct; Reverse Inquiry
Collateralized CDs
Definition: Deposits (Time or CDs) safekept at a depository
held in the name of the investing entity. Deposits are backed by
eligible assets as collateral.

  Advantages                               Disadvantages

  •   Competitive Yields                   •   NOT FDIC insured
  •   Ease of Transaction                  •   Limited Issuers
  •   Single Settlement Location           •   Early Withdraw Penalties
  •   Business of Scales                   •   No Secondary Market
  •   Flexible Terms and Settlement Date   •   Cost of Collateral
  •   Qualifies for most Public Units

Availability/Transaction Process: Limited Inventory; Typically a 3rd
     party custodial agreement needs to be executed; Broker/Dealer
         or Direct
Deposit Insurance for
Public Units1
The insurance coverage of a public unit account depends upon (1) the
type of deposit; and (2) the location of the insured depository institution.
All “time and savings deposits” owned by a public unit and held by the
same official custodian in an insured depository institution within the state
in which the public unit is located are added together and insured up to
$100,000. Separately, all “demand deposits” owned by a public unit and
held by the same official custodian in an insured depository institution
within the state in which the public fund is located are added together and
insured up to $100,000.
A political subdivision (through its “official custodian”) is entitled to its own
insurance coverage.
An official custodian is an officer, employee or agent of a public unit having
   official custody of public funds and lawfully depositing funds in an
         insured institution.
(Certificate of Deposit Account Registry Service)

Definition: Placement service that monitors and distributes
single CD transactions to a number of issuing banks, as to
keep the deposit FDIC insured

Advantages                               Disadvantages
• FDIC Insured (“Pass-Through”)          • Limited Number of Issuers
• Up to $50MM in Transactions              (principal limits)
• Single Transaction                     • Limited Availability to Maturity and
• Complies with many State Public          Settlement dates
  Funds Acts                             • Does not satisfy all Public Fund
• Single Interest Disbursement             Requirements (by State)
• Competitive Yields                     • Early Withdrawal Penalties
• No Placement Fees

    Availability/Transaction Process: Available through eligible
       depositories. Can be purchased through a local bank (pending
          availability) or through a national broker/dealer. Transactions are
             individually negotiated. Statements are originated and provided
               by the issuing depository.
Negotiable CDs
Definition: Time deposits that are safekept (book entry)
at the DTC and trade in primary and secondary market
  Advantages                            Disadvantages
  •   Flexible Terms                    •   Insurance Limits
  •   Competitive Rates                 •   Limited Issuers
  •   Secondary Market (CUSIP)          •   No Early Withdrawal Provision
  •   Held in Securities Account        •   Cannot be Collateralized
  •   Growing Market                    •   Secondary Market Interest Rate
  •   FDIC Insured (Pass-Through)           Risk
  •   Method of Interest Disbursement
  •   No Placement Fees

Availability/Transaction Process: Must be purchased from an FINRA
broker dealer; B/D new account documentation; Ease of transaction;
     Central holding location; Reverse inquiry
Depository Trust Company-(DTC)
Depository Trust Company-(DTC) is a member of the U.S.
Federal Reserve System, a limited-purpose trust company
under New York State banking law and a registered clearing
agency with the Securities and Exchange Commission. The
depository brings efficiency to the securities industry by
retaining custody of some 2 million securities issues,
effectively “dematerializing” most of them so that they exist
only as electronic files rather than as countless pieces of
paper. The depository also provides the services necessary
for the maintenance of the securities it has in custody.
FDIC Celebrates 75 Years
FDIC Insurance

• FDIC issues a temporary increase in insurance limits
  from $100,000 to $250,000 effective October 3, 2008
• Increase expires on December 31,2009 unless
• Full Principal & Interest Insurance Coverage Limits
    Monthly interest - $249,000 <= 4.85%
    Semi-Annual      - $245,000 <= 4.00%
    @Maturity        - $240,000 <= 4.00%
 US Agencies

 GNMA – Government National Mortgage Association

 Mortgage Backed Securities
 Others include – SBA, FHA, HUD, GSA, FMHA
   Less frequent debt offerings

 Full Faith & Credit of U.S. Government
 AAA Credit Quality
Government Sponsored
Enterprise (GSE’s)

  - Often referred to as Agency Bonds or GSE’s

 Sponsored but not guaranteed by Federal Government

 Rated AAA

 Government-sponsored enterprises are financing entities
  created by Congress to fund loans to certain groups of
  borrowers such as homeowners, farmers and students.
Agency/Instrumentality Securities

 Full faith and credit or implied backing of the U.S.

 Benchmarks, reference notes and global auctions

 Customized structures

 Various call types

 Bought through broker/dealers
      New issue
      Secondary market
Normal Yield curve
• Slopes gently upward
• Longer term investors demand more yield
• Normal economic growth
 Flat Yield curve

• Long term Yields are the same as Short Term Rates
• Odds are high for economic slowdown
Inverted (Negative) Sloped
Yield Curve

  • Short term rates higher than long term
   • Expectations are for lower rates
      • Could signal an economic slowdown
             or recession
Investment Strategies

1. Expense Matching
2. Extension of Term
    Cost of Waiting
3. Maturity Ladder
4. Barbell
5. Diversification
Expense Matching

 Covering expenses are number 1 priority.
 Don’t over extend maturities past obligations.
 Cash management is key.

                                •Fixed Rate
                                •Fixed Term
Extension of Term
Overnight Rate (Money Market) vs. 1 year investment
The following examples show the benefit of extending the maturity
from an overnight rate to a 1 year maturity.
Current Overnight Rate vs. Current 12 month investment
          Rate = 2.25%                           Rate = 3.75%
After 3 months time the investor will need to receive an overnight rate of
4.25% to break even with the investor that bought a 12-month term.
In other words the investor that purchased the 12-month investment
would receive $3750 in interest on a $100k investment. The investor that
kept the funds in an overnight investment with a rate of 2.25% for the first
3 months would receive $562.50, which means that the investor would
need to get a rate of 4.25% for the 9 remaining months to break even.
Laddered Maturity
Bonds in the portfolio are evenly
distributed between short-term rungs,
                                                                                         5-year bond at
intermediate rungs, and long-term rungs.                                                     5.00%

As short-term bonds mature, the funds are                                                4-year bond at
returned or reinvested into long-term
bonds.                                                                                  3-year bond at

Securities are held to maturity.                                                        2-year bond at

                                                                                        1-year bond at

          This example is for institutional investors only and is not meant for public customers. Information
          contained herein has been obtained from sources believed to be reliable; however, Multi-Bank Securities,
          Inc. does not guarantee or warrant its completeness or accuracy.
  Barbell Strategy
 A bond investment strategy that concentrates holdings in
  both short-term and long-term maturities.

 When charting the strategy on a timeline it looks like a
  barbell (dumbbell).

 This strategy allows one portion of the portfolio to achieve
  high yields while the other portion minimizes risk.

 Don’t put all your eggs in one basket
    Maximize Full Faith & Credit coverage

 Mix bullets, callable and structured securities

 Ladder maturities and call dates

Think SLY , safety, liquidity and yield (In that order)
Callable Securities
A bond that can be redeemed by the issuer
prior to maturity.

 The main cause of a call is a decline in interest rates
  since the first date of issue. If the interest rate is
  lower on the call date, the issuer would likely call
  the current issue of bonds and distribute a new
  issue at a lower interest rate.

Callable Terminology
Lockout (or call protection): refers to the period between the issue date
and the first exercise date during which the issuer may not exercise the
Call frequency: refers to the frequency of call dates on which the issuer
can redeem the bond. Callable structures incorporate one of three
differentoption types: American, Bermudan, or European.
  American options gives the issuer the ability to call the bond any
   time after the lockout date. It provides the greatest flexibility in timing
   the call decision and imparts the greatest call risk to the investor,
   since each day after the initial lockout represents a potential call
  Bermudan options give the issuer the ability to call the note at
   several points in time, but not continuously; examples include
   monthly, quarterly, or semi-annually. The most typical Bermudan
   structure allows the issuer to call the bond on any coupon date after
   the initial lockout.
            European options may be called only once during the life
            of the bond, on the call date.
Callable Spreads
Relationships Among Bond Prices,
Yields and Maturities

         Prices and Yields: An Inverse Relationship


   101                                                 6.00%

  100                                                  5.00%


  99                                                    4.00%

                         1 year maturity
Valuing Callable Securities

Yield Calculation
    Yield to Maturity
    Yield to Call
    Yield to Worst

   *** Always ask for the Yield to Worst ***
New Issue Monitor
 Step Up Coupons
 A step-up security is a security that has an initial fixed
  interest rate which is paid up to a specific date, usually a
  call date. The coupons will automatically reset on specific
  dates if it is not called.

 A step-up security can have more than one step, as well as
  call structures.

 Step up securities are typically structured so that they are
  callable by the issuer at specific call dates.
  Canary Bond
 A step-up bond that cannot be called after completing its
  first-step period. The issuer of the bond reserves the option
  to call back the bond until the first step is reached. A canary
  call may only be exercised on predetermined dates.

     The canary call is similar to a Bermuda option, as it must be
      called on specific dates. If the issuer of the bond chooses
      not to call before the canary call expires, the bond will
      remain a standard step-up bond, where the coupon rate will
      increase with each step-up period.
  Helpful Websites
Due Diligence Website           Research Websites   Broker Check    Bank Info
                           Advisor Check

                                Agency Websites

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