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ATTACHMENT 2 <br />16 <br />risk as the investor may receive its principal back when interest rates are lower <br />than when the investment was initially made. <br />CERTIFICATE OF DEPOSIT (CD). A time deposit with a specific maturity evidenced by a <br />certificate. Large denomination CDs may be marketable. <br />CERTIFICATE OF DEPOSIT ACCOUNT REGISTRY SYSTEM (CDARS). A private placement <br />service that allows local agencies to purchase more than $250,000 in CDs from a <br />single financial institution (must be a participating institution of CDARS) while still <br />maintaining FDIC insurance coverage. CDARS is currently the only entity providing <br />this service. CDARS facilitates the trading of deposits between the California <br />institution and other participating institutions in amounts that are less than <br />$250,000 each, so that FDIC coverage is maintained. <br />COLLATERAL. Securities or cash pledged by a borrower to secure repayment of a loan or <br />repurchase agreement. Also, securities pledged by a financial institution to secure <br />deposits of public monies. <br />COLLATERALIZED MORTGAGE OBLIGATIONS (CMO). Classes of bonds that redistribute the <br />cash flows of mortgage securities (and whole loans) to create securities that have <br />different levels of prepayment risk, as compared to the underlying mortgage <br />securities. <br />COMMERCIAL PAPER. The short-term unsecured debt of corporations. <br />COST YIELD. The annual income from an investment divided by the purchase cost. <br />Because it does not give effect to premiums and discounts which may have been <br />included in the purchase cost, it is an incomplete measure of return. <br />COUPON. The rate of return at which interest is paid on a bond. <br />CREDIT RISK. The risk that principal and/or interest on an investment will not be paid in a <br />timely manner due to changes in the condition of the issuer. <br />CURRENT YIELD. The annual income from an investment divided by the current market <br />value. Since the mathematical calculation relies on the current market value rather <br />than the investor’s cost, current yield is unrelated to the actual return the investor <br />will earn if the security is held to maturity. <br />DEALER. A dealer acts as a principal in security transactions, selling securities from and <br />buying securities for his own position. <br />DEBENTURE. A bond secured only by the general credit of the issuer. <br />DELIVERY VS. PAYMENT (DVP). A securities industry procedure whereby payment for a <br />security must be made at the time the security is delivered to the purchaser’s <br />agent. <br />DERIVATIVE. Any security that has principal and/or interest payments which are subject to <br />uncertainty (but not for reasons of default or credit risk) as to timing and/or amount, <br />or any security which represents a component of another security which has been <br />separated from other components (“Stripped” coupons and principal). A derivative <br />is also defined as a financial instrument the value of which is totally or partially <br />derived from the value of another instrument, interest rate, or index. <br />DISCOUNT. The difference between the par value of a bond and the cost of the bond, when <br />the cost is below par. Some short-term securities, such as T-bills and banker’s <br />acceptances, are known as discount securities. They sell at a discount from par <br />and return the par value to the investor at maturity without additional interest. Other <br />Page 49 of 248