Laserfiche WebLink
ATTACHMENT 2 <br />17 <br />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 />Page 50 of 248