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securities, which have fixed coupons, trade at a discount when the coupon rate is <br /> lower than the current market rate for securities of that maturity and/or quality. <br /> DIVERSIFICATION. Dividing investment funds among a variety of investments to avoid <br /> excessive exposure to any one source of risk. <br /> DURATION. The weighted average time to maturity of a bond where the weights are the <br /> present values of the future cash flows. Duration measures the price sensitivity of <br /> a bond to changes in interest rates. (See modified duration). <br /> FEDERAL FUNDS RATE. The rate of interest charged by banks for short-term loans to other <br /> banks. The Federal Reserve Bank through open-market operations establishes it. <br /> FEDERAL OPEN MARKET COMMITTEE. A committee of the Federal Reserve Board that <br /> establishes monetary policy and executes it through temporary and permanent <br /> changes to the supply of bank reserves. <br /> LEVERAGE. Borrowing funds in order to invest in securities that have the potential to pay <br /> earnings at a rate higher than the cost of borrowing. <br /> LIQUIDITY. The speed and ease with which an asset can be converted to cash. <br /> LOCAL AGENCY INVESTMENT FUND(LAIF).A voluntary Investment fund Open to government <br /> entities and certain non-profit organizations in California that is managed by the <br /> State Treasurer's Office. <br /> LOCAL GOVERNMENT INVESTMENT POOL. Investment pools that range from the State <br /> Treasurer's Office Local Agency Investment Fund (LAIF) to county pools, to Joint <br /> Powers Authorities (JPAs). These funds are not subject to the same SEC rules <br /> applicable to money market mutual funds. <br /> MAKE WHOLE CALL. A type of call provision on a bond that allows the issuer to pay off the <br /> remaining debt early. Unlike a call option, with a make whole call provision, the <br /> issuer makes a lump sum payment that equals the net present value (NPV) of <br /> future coupon payments that will not be paid because of the call. With this type of <br /> call, an investor is compensated, or "made whole." <br /> MARGIN. The difference between the market value of a security and the loan a broker <br /> makes using that security as collateral. <br /> MARKET RISK. The risk that the value of securities will fluctuate with changes in overall <br /> market conditions or interest rates. <br /> MARKET VALUE. The price at which a security can be traded. <br /> MARKING TO MARKET. The process of posting current market values for securities in a <br /> portfolio. <br /> MATURITY. The final date upon which the principal of a security becomes due and payable. <br /> MEDIUM TERM NOTES. Unsecured, investment-grade senior debt securities of major <br /> corporations which are sold in relatively small amounts on either a continuous or <br /> an intermittent basis. MTNs are highly flexible debt instruments that can be <br /> structured to respond to market opportunities or to investor preferences. <br /> MODIFIED DURATION. The percent change in price for a 100 basis point change in yields. <br /> Modified duration is the best single measure of a portfolio's or security's exposure <br /> to market risk. <br /> MONEY MARKET. The market in which short-term debt instruments (T-bills, discount notes, <br /> commercial paper, and banker's acceptances) are issued and traded. <br /> 17 <br />