HomeMy WebLinkAboutResolutions - No. 2013-186RESOLUTION NO. 2013-186
A RESOLUTION OF THE LODI CITY
COUNCIL ADOPTING THE CITY OF LODI
INVESTMENT POLICY AND INTERNAL
CONTROL GUIDELINES
WHEREAS, pursuant to California Government Code §53646, the City Council
may annually review and adopt the City of Lodi Investment Policy; and
WHEREAS, the Policy, attached hereto marked Exhibit A, is in compliance with
State laws governing the investment of local agency funds and provides internal control
guidelines to protect the funds of the City from misappropriation, speculation, and fraud.
NOW, THEREFORE, BE IT RESOLVED that the City Council of the City of Lodi
has reviewed and hereby adopts the City of Lodi Investment Policy and Internal Control
Guidelines, which shall be effective this date.
Dated: November 6, 2013
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I hereby certify that Resolution No. 2013-186 was passed and adopted by the
City Council of the City of Lodi in a regular meeting held November 6, 2013, by the
following vote:
AYES: COUNCIL MEMBERS — Hansen, Johnson, Katzakian, and
Mayor Nakanishi
NOES: COUNCIL MEMBERS — None
ABSENT: COUNCIL MEMBERS — Mounce
ABSTAIN: COUNCIL MEMBERS —None
&NL-OLScON
City Clerk
2013-186
CITY OF LODI
INVESTMENT POLICY
AND
INTERNAL CONTROL GUIDELINES
City of Lodi
TABLE OF CONTENTS
SECTION DESCRIPTION Page
Investment Policies
Introduction 1
Scope 1
Objectives 1
Delegation of Authority 2
Prudence 2
Ethics and Conflicts of Interest 3
Monitoring and Adjusting the Portfolio 3
Internal Controls 3
Reporting 3
Authorized Investments 4
Banks and Security Dealers 6
Purchase of CD's from Local Institutions 7
Safekeeping and Collateralization 8
Administration 8
II Internal Controls
General 11
Procedures 12
Treasury Function Responsibilities 13
III Sample of Investment Forms
Investment Bid Sheet 15
Broker/Dealer Questionnaire 16
IV Glossary 21
INVESTMENT
POLICIES
City of Lodi
INVESTMENT POLICY
1. INTRODUCTION
The purpose of this policy is to state the City's policies and procedures to be used for the investment
of surplus funds in a prudent and systematic manner conforming to all state and local statutes
governing the investment of public funds. Safety of principal is given the highest priority. In
addition, this statement is intended to formalize investment -related activities to provide the highest
investment return with maximum security while meeting daily cash flow demands.
2. SCOPE
The investment policy applies to all funds under the direct authority of the Deputy City
Manager/City Treasurer of the City of Lodi, including but not limited to the General Fund, Special
Revenue Funds, Capital Project Funds, Enterprise Funds, Internal Service Funds and Trust and
Agency Funds. All funds are accounted for in the City's Comprehensive Annual Financial Report.
. Investments of debt proceeds held by bond trustee are governed by the provisions of the debt
agreements and to the extent that they are permissible investments of funds of the City. Proceeds of
bonds will be invested in accordance with the ordinance, resolution, indenture or other agreement
governing the issuance of the bonds.
3. OBJECTIVES
Funds of the City will be invested with the following objectives in priority order:
Safety:
Safety of principal is the foremost objective of the investment program. Investments of the City of
Lodi shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall
portfolio. To attain this objective, diversification is required in order that potential losses on
individual securities do not exceed the income generated from the remainder of the portfolio. The
City of Lodi will diversify its investments by security type and institution. Financial institutions and
broker/dealers will be prequalified and monitored as well as investment instruments they propose.
Liquidity:
The investment portfolio will remain sufficiently liquid to enable the City to meet all operating
requirements which might be reasonably anticipated. This will be accomplished through maturity
diversification in accordance with California Government Code 53635 and the State Local Agency
Investment Fund with immediate withdrawal provision.
City of Lodi
INVESTMENT POLICY
Return on Investments:
The City's investment portfolio shall be invested to achieve a "bench marked average" rate of return
through economic cycles, that will protect these funds from the effects of inflation and the risks
associated with higher returns, as long as it does not diminish the objectives of Safety and Liquidity,
while preserving and protecting capital in the overall portfolio.
The "bench marked average" rate of return targeted to achieve this objective is the annual rate of
return on the one-year U.S. Treasury Bill. Whenever possible and in a manner consistent with the
objectives of safety of principal and liquidity, a yield higher than the "bench marked average" rate
of return shall be sought.
4. DELEGATION OF AUTHORITY
The Treasurer is designated by the authority of the legislative body as the investment officer of the
City as provided for in Government Code Section 53607 and is responsible for the investment
decisions and activities of the City. The Treasurer will develop and maintain written administrative
procedures for the operation of the investment program, consistent with this investment policy.
The Treasurer shall hereafter assume full responsibility for such transactions until such time as the
delegation of authority is revoked, and shall make a monthly report of such transactions to the
legislative body. In order to optimize total return through active portfolio management, daily
activity may be delegated to the Supervising Budget Analyst.
5. PRUDENCE
The standard of prudence to be applied by the Treasurer will be the "prudent investor" standard, in
accordance with Government Code Section 53600.3 which states "...all governing bodies of local
agencies or persons authorized to make investment decisions on behalf of those local agencies
investing public funds pursuant to this chapter are trustees and therefore fiduciaries subject to the
prudent investor standard. When investing, reinvesting, purchasing, acquiring, exchanging, selling,
or managing public funds, a trustee shall act with care, skill, prudence, and diligence under the
circumstances then prevailing, including, but not limited to, the general economic conditions and the
anticipated needs of the agency, that a prudent person acting in a like capacity and familiarity with
those matters would use in the conduct of funds of a like character and with like aims, to safeguard
the principal and maintain the liquidity needs of the agency. Within the limitations of this section
and considering individual investments as part of an overall strategy, investments may be acquired
as authorized by law."
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I City of Lodi
INVESTMENT POLICY
6. ETHICS AND CONFLICTS OF INTEREST
The City Treasurer is governed by The Political Reform Act of 1974 regarding disclosure of
material financial interests as well as Government Code Section 87103. The City Treasurer shall
refrain from personal business activity that could conflict with proper execution of the investment
program or which could impair the ability to make impartial investment decisions.
7. MONITORING AND ADJUSTING THE PORTFOLIO
The Treasurer will routinely monitor the contents of the portfolio, the available markets and the
relative values of competing instruments, and will adjust the portfolio accordingly.
8. INTERNAL CONTROLS
The Treasurer will establish a system of written internal controls, which will be reviewed annually
by the City's independent audit firm. The controls will be designed to prevent loss of public funds
due to fraud, error, misrepresentation, unanticipated market changes or imprudent actions.
9. REPORTING
The Treasurer will submit a quarterly investment report to the City Council, in accordance with
Government Code Section 53646, to disclose the following information:
• A listing of individual securities held at the end of the reporting period by authorized
investment category.
• Percentage of the portfolio represented by each investment category.
• Institution
• Average life and final maturity of all investments listed.
• Coupon, discount or earnings rate.
• Par value or cost of the security
• Current market value of securities with maturity in excess of 12 months and the source of
this valuation.
• Ability of the city to meet its expenditure requirements for the next six months or provide
an explanation of why sufficient funds will not be available as required by Gov. Code
53646 (b)(3).
The quarterly investment report to the Lodi City Council, acting legislative authority, as endorsed by
Government Code Section 53646, will be in addition to the Treasurer's monthly report and
accounting of all receipts, disbursements and fund balances.
City of Lodi
INVESTMENT POLICY
In addition, the investment policy will be submitted to the City Council amually in Nevember as
changes are needed. Any changes will be noted and formal adoption in the form of a resolution of the
City Council is required.
10. AUTHORIZED INVESTMENTS
The City will invest surplus funds not required to finance the immediate needs of the City as
provided in California Government Code Sections 16429.1, 53601, 53601.6, 53601.8, 53635,
53635.2, 53638 and 53684. In selecting authorized investments consideration must be given to
credit ratings and collateralization of applicable instruments. A list of these instruments is
provided below. These limitations, diversification and maturity scheduling will depend upon
whether the funds being invested are considered short-term or long-term funds. All funds will be
considered short-term except those reserved for capital projects and special assessment
prepayments being held for debt retirement.
Pooled Accounts
The City of Lodi is authorized by policy, to invest in the Local Agency Investment Fund (LAIF), a
voluntary program created by statute, which began in 1977 as an investment alternative for
California's local governments and special districts and continues today under the State Treasurer's
Administration. The enabling legislation of the LAIF is Section 16429.1,2,3 of the California
Government Code.
The LAIF is part of the Pooled Money Investment Account (PMIA). The PMIA began in 1953 and
has oversight provided by the Pooled Money Investment Board (PMIB) and an in-house
Investment Committee. The PMIB members are the State Treasurer, Director of Finance, and State
Controller.
All securities are purchased under the authority of Government Code Section 16430 and 16480.4.
The State Treasurer's Office takes delivery of all securities purchased on a delivery versus payment
basis using a third party custodian. All investments are purchased at market and market valuation
is conducted monthly.
It has been determined that the State of California cannot declare bankruptcy under Federal
regulations, thereby allowing the Government Code Section 16429.3 to stand. This Section states
that "money placed with the state treasurer for deposit in the LAIF shall not be subject to either: (a)
transfer or loan pursuant to Sections 16310, 16312, or 16313, or (b) impoundment or seizure by
any state official or state agency."
The LAIF provides a book entitled "The Local Agency Investment Fund Answer Book" which
resides in the City of Lodi Treasurer's office and provides current answers to the following
questions, which are required prior to investing in any pooled/fund account.
City of Lodi
4
INVESTMENT POLICY
• A description of eligible investment securities and a written statement of investment policy and
objectives.
• A description of interest calculations and how it is distributed, and how gains and losses are
treated.
• A description of how the securities are safeguarded (including the settlement processes), and
how often the securities are priced and the program audited.
• A description of who may invest in the program, how often, what size deposit and withdrawal
are allowed.
• A schedule for receiving statements and portfolio listing.
• A fee schedule and when and how it is assessed.
• Is the pool/fund eligible for bond proceeds and/or will it accept such proceeds?
The City of Lodi is authorized by policy to invest in shares issued by the Investment Trust of
California (CalTRUST), a joint powers authority created under the authority of California
Government Code Section 6509.7, as an investment alternative for California's local governments
and special districts. CalTRUST began in 2005 and has oversight provided by a Board of Trustees,
consisting of experienced local treasurers and finance directors.
All securities purchased by CalTRUST are securities which are eligible for direct local agency
investment under the authority of California Government Code Section 53601. All securities are
purchased at market value, and market valuation of all securities in the CalTRUST portfolios is
conducted on a daily basis. The CalTRUST program offers three account options: the CalTRUST
Heritage Money Market option, which provides same-day liquidity (access to funds); the
CalTRUST Short -Term Fund, which offers next -day liquidity; and the CalTRUST Medium -Term
Fund, which provides monthly liquidity.
Short -Term Portfolio Diversification
The City will diversify use of investment instruments to avoid incurring unreasonable risks
inherent in over investing in specific instruments, individual financial institutions or maturities.
Where this section does not specify a limitation on the term or remaining maturity at the time of the
investment, no investment will be made in any security which at the time of the investment has a
term remaining to maturity in excess of five years, unless the City Council has granted express
authority to make that investment either specifically or as part of an investment program and
approved by the City Council no less than three months prior to the investment.
City of Lodi
INVESTMENT POLICY
Percent of
Portfolio
100%
100%
40%
100%
30%
40%
100%
100%
N/A
N/A
20%
30%
100%
30%
_The City Treasurer will not invest in Repurchase Agreements and Reverse Repurchase agreements.
Pooled funds invested for the City by entities such as California State Local Agency Investment
Fund, and NCPA may invest in repurchase and reverse repurchase agreements. If repurchase
agreements are legal and authorized, by policy, a Master Repurchase Agreement must be signed
with the bank or dealer.
Diversification by Financial Institution
Bankers' Acceptances (Bas)
No more than 25% of the total portfolio with any one institution.
Certificates of Deposit (CDs)
No more than 33% of the total portfolio with any one institution.
California State Local Agency Investment Fund
No more than $50 million in any one account, effective November 16, 2009.
Maturity Scheduling
Investment maturities for operating funds shall be scheduled to coincide with projected cash flow
needs, taking into account large routine expenditures (payroll, bond payments) as well as
considering sizable blocks of anticipated revenue (taxes, franchise fees). Maturities in this category
will be timed to comply with the following guidelines:
Under 3 0 days
Under 90 days
Under 270 days
Under 1 year
Under 18 months
Under 2 years
Under 5 years
of Lodi
INVESTMENT POLICY
10% minimum
25% minimum
50% minimum
75% minimum
90% minimum
95% minimum
100% minimum
Maximum
Permitted Investments
Maturity
U.S. Treasury Obligations (Bills, notes and bonds)
5 Years
U.S. Government Agency Securities and Instrumentalities
5 Years
Bankers Acceptances
180 days
Certificates of Deposit
5 Years
Negotiable Certificates of Deposit
5 Years
Commercial Paper
270 days
California State Local Agency Investment Fund
Indefinite
Passbook Deposits
Indefinite
Repurchase Agreements
Not Authorized
Reverse Repurchase agreements
Not Authorized
Mutual Funds
Indefinite
Medium Term Notes
5 Years
Ca1TRUST Pooled Accounts
Indefinite
Certificate of Deposit Account Registry Service (CDA
5 Years
Percent of
Portfolio
100%
100%
40%
100%
30%
40%
100%
100%
N/A
N/A
20%
30%
100%
30%
_The City Treasurer will not invest in Repurchase Agreements and Reverse Repurchase agreements.
Pooled funds invested for the City by entities such as California State Local Agency Investment
Fund, and NCPA may invest in repurchase and reverse repurchase agreements. If repurchase
agreements are legal and authorized, by policy, a Master Repurchase Agreement must be signed
with the bank or dealer.
Diversification by Financial Institution
Bankers' Acceptances (Bas)
No more than 25% of the total portfolio with any one institution.
Certificates of Deposit (CDs)
No more than 33% of the total portfolio with any one institution.
California State Local Agency Investment Fund
No more than $50 million in any one account, effective November 16, 2009.
Maturity Scheduling
Investment maturities for operating funds shall be scheduled to coincide with projected cash flow
needs, taking into account large routine expenditures (payroll, bond payments) as well as
considering sizable blocks of anticipated revenue (taxes, franchise fees). Maturities in this category
will be timed to comply with the following guidelines:
Under 3 0 days
Under 90 days
Under 270 days
Under 1 year
Under 18 months
Under 2 years
Under 5 years
of Lodi
INVESTMENT POLICY
10% minimum
25% minimum
50% minimum
75% minimum
90% minimum
95% minimum
100% minimum
Long -Term Portfolio Diversification
Investments and diversification for the long-term portfolio will be the same as the short-term
portfolio. Maturity scheduling will be timed according to anticipated need. For example,
investment of capital project funds will be timed to meet contractor payments, usually for a term not
to exceed three years. Investment of prepaid assessment funds will be tied to bond payment dates,
after cash flow projections are made using a forecasting model which considers prepayment rate,
delinquency rate, interest on bonds and income on investments.
11. BANKS AND SECURITY DEALERS
The Treasurer will consider the credit worthiness of institutions in selecting financial institutions
for the deposit or investment of City funds. These institutions will be monitored to ensure their
continued stability and credit worthiness.
Investment transactions will only be made with pre -approved financial institutions. Banks will
provide their most recent Consolidated Report of Condition ("call report") at the request of the
Treasurer.
The Treasurer will maintain a list of financial institutions authorized to provide investment
services. In addition, a list will be maintained of approved security brokers/dealers selected for
credit worthiness, who maintain an office in the State of California. This includes primary
dealers or regional dealers that qualify under Securities and Exchange Commission Rule 150-1.
All financial institutions and broker/dealers who desire to become qualified bidders for
investment transactions must supply the Treasurer with the following:
• Audited financial statements
• Proof of Financial Industry Regulatory Authority registration.
• Trading Resolution
• Proof of State Registration
• Completed broker/dealer questionnaire
• Certification of having read the City of Lodi's investment policy and depository
contracts.
An annual review of the financial condition and registration of qualified bidders will be
conducted by the Treasurer. The City will not normally use more than three qualified
dealer/brokers to obtain bids.
City of Lodi
INVESTMENT POLICY
12. PURCHASE OF CDs FROM LOCAL INSTITUTIONS
To the extent reasonable and within the limits specified above, the Treasurer may purchase a
Certificate of Deposit, up to the amount fully insured by the Federal Deposit Insurance
Corporation (FDIC), from each bank and savings and loan institution located within the corporate
limits of the City to promote economic development and as a statement of support for those
institutions maintaining an office in Lodi. These investments are limited to those institutions
which offer Certificates of Deposit insured by the Federal Deposit Insurance Act and have a
Community Reinvestment Act Rating of satisfactory or above.
To aid in the diversification of the portfolio, additional Certificates of Deposit in amounts up to
fully insured FDIC limits, may be purchased from local institutions provided the investment has
the safety, liquidity and a rate of return comparable to that offered from LAW at the time the
original investment is made.
13. SAFEKEEPING AND COLLATERALIZATION
All investment securities purchased by the City will be held in third -party safekeeping by an
institution designated as primary agent. The custodian will hold these securities in a manner that
establishes the City's right of ownership. The primary agent will issue a safekeeping receipt to
the City listing the specific instruments, rate, maturity and other pertinent information.
Deposit type securities (i.e., certificates of deposit) will be collateralized.
Collateral for time deposits in savings and loans will be held by the Federal Home Loan Bank or
an approved Agent of Depository. If collateral is government securities, 110% of market value to
the face amount of the deposit is required. Promissory notes secured by first mortgages and first
trust deeds used as collateral require 150% of market value to the face amount of the deposit. An
irrevocable letter of credit issued by the Federal Home Loan Bank of San. Francisco requires
105% of market value to the face amount of the public deposit.
The collateral for time deposits in banks should be held in the City's name in the bank's Trust
Department, or alternately, in the Federal Reserve Bank. The City may waive collateral
requirements for deposits which are fully insured up to limits prescribed by the FDIC.
The amount of securities placed with an agent of depository will at all times be maintained in
accordance with California Government Code 53652.
City of Lodi
INVESTMENT POLICY
14. ADMINISTRATION
The following administrative policies will be strictly observed:
a. Payment
All transactions will be executed on a delivery versus payment basis which should be done by
the City's safekeeping agent.
b: Bid
A competitive bid process in which three competitive bids are obtained, when practical, will
be used to place all investment purchases. If a specific maturity date is required, either for
cash flow purposes or for conformance to maturity guidelines, bids will be requested for
instruments which meet the maturity requirement. If no specific maturity is required, a market
trend (yield curve) analysis will be conducted to determine which maturities would be most
advantageous.
c. Wire Transfers
All wire transfers will be approved by the Treasurer or Supervising Budget Analyst. The
City's bank will verify each transaction with a predetermined City employee other than the
individual sending the wire transfer.
Pre -formatted wire transfers will be used to restrict the transfer of funds with preauthorized
accounts only.
d. Confirmations
Receipts for confirmation of a purchase of authorized securities should include the following
information: trade date; par value; maturity; rate; price; yield; settlement date; description of
securities purchased; net amount due; third -party custodial information. Confirmations of all
investment transactions are to be received by the Treasurer within three business days.
e. Pooled Cash
The City will consolidate into one bank account and invest on a pooled concept basis. Interest
earnings will be allocated monthly based on current cash balances.
f Bond Proceeds
The City will comply with applicable federal tax law and regulations in connection with the
investment of bond proceeds.
INTERNAL
CONTROLS
City of Lodi
INTERNAL CONTROLS
GENERAL
Through this system of internal control, the City is adopting procedures and establishing safeguards to
prevent or limit the loss of funds invested or held for investment due to errors, losses, misjudgments
and improper acts. Internal control procedures are not intended to address every possible situation but
are intended to provide a reasonable and prudent level of protection for the City's funds.
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1. Objectives
These procedures and policies are established to ensure:
• the orderly and efficient conduct of investment practices, including adherence to investment
policies
• the safeguarding of surplus cash
• the prevention or detection of errors and fraud
• the accuracy and completeness of investment records
• the timely preparation of reliable investment reports.
2. General Control Policies
The following policies are to be used to safeguard investments:
• Organization
A description of responsibilities and procedures for the investment of City funds, lines of
authority and reporting requirement will be maintained.
Personnel
Only qualified and assigned personnel will be authorized to approve investment transactions;
make and liquidate investments; maintain investment records; and maintain custody of
negotiable instruments. Personnel assigned responsibility for the investment of City surplus
funds will maintain their professional qualifications by continued education and membership
in professional associations.
• Segregation of functions
No one having general ledger functions will have responsibility for the investment of City
funds.
• Safekeeping
All securities are to be held in the name of the City of Lodi. The City will contract with a
third party, usually a bank, to provide custodial services and securities safekeeping.
Although a cost is involved, the risk of losing physical securities outweighs the fees involved.
Preference should be given to custodial services which include reporting services as part of
their service, including marking the portfolio to market value, performance evaluation and
internal reporting.
City of Lodi
INTERNAL CONTROLS
• Reconciliation of records
Regular and timely reconciliation will be made of detailed securities records with the general
ledger control account.
• Performance evaluation
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Performance statistics will be maintained and reported monthly as provided in the
Investment Policies. The indices to be used is the rate of return for the one-year U.S.
Treasury Bill and the annual rate of return for the Local Agency Investment Fund (LAIF)
managed by the State Treasurer's Office.
PROCEDURES
Assigned Responsibilities
a. City Council responsibilities:
• Adoption of City's investment policies by Resolution
• Review and evaluation of investment performance.
b. Deputy City Manager/Treasurer duties and responsibilities:
• Formulating, recommending and implementing the City's investment policies
• Approves all investment transactions prior to execution of any transaction
• Approves broker/dealer arrangements.
c. Supervising Budget Analyst duties and responsibilities:
• Recommends broker/dealer arrangements
• Recommends investments
• Executes investment transactions
• Maintains records of all investment transactions
• Prepares monthly investment report for City Council review
• Prepare fiscal year end investment reports for City's independent audit firm review
• Review's financial condition of the City's depositories (banks) at least annually for compliance with
collateralization requirements under government code and financial condition and reports results to
City Treasurer.
d. Financial Services Manager duties and responsibilities:
• Maintains general ledger control account and duplicate records of investment transactions
• Verifies investment records and reconciles detailed securities records with general ledger control
accounts.
e. City's independent audit firm.
• Will review the City's investment policies and procedures and make appropriate recommendations and
findings as to compliance and steps to be taken to improve internal controls.
City of Lodi
TREASURY FUNCTION RESPONSIBILITIES
FUNCTION
1. Recommendations:
RESPONSIBILITIES
• Recommends broker/dealer arrangements Supervising Budget Analyst
• Recommends investments Supervising Budget Analyst
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2. Authorization of Investment Transactions
• Formal investment policy prepared by Deputy City Manager/Treasurer
• Formal investment policy approved by City Council
• Investment transactions approved by Deputy City Manager/Treasurer
• Broker/deal arrangements approved by Deputy City Manager/Treasurer
3. Execution of Investment Transactions Supervising Budget Analyst
4. Recording of Investment Transactions
• Recording of transactions in
Treasurer's records Supervising Budget Analyst
• Recording of transactions in
Accounting records Financial Services Manager
5. Safeguarding of assets and records
• Maintenance of Treasurer's records Supervising Budget Analyst
• Reconciliation of Treasurer's records
to accounting records Financial Services Manager
• Review of (a) financial institution's
financial condition, (b) safety, liquidity,
and potential yields of investment instruments,
and (c) reputation and financial condition of
investment brokers Supervising Budget Analyst
• Periodic reviews of collateral Supervising Budget Analyst
• Review and evaluation of performance City Council
6. Preparation of reports Supervising Budget Analyst
7. Periodic review of investment portfolio for
conformance to City's investment policy City's Audit Firm
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Date:
Recommended Selection
Primary Dealer
Quotes
Firm
Dealer
Telephone #
SAMPLE
INVESTMENT FORMS
CITY OF LODI
INVESTMENT BID SHEET
Cycle to:
Management Analyst:
Fin. Services Manager:
Transaction #1 Transaction #2 Transaction #3
Invest Withdraw Invest Withdraw Invest Sell
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Security Type
Price
Maturity Date
1 st Call Date
Yield to Maturity
Purchase Price
Cusip #
Principal
Discount
Accrued Interest
Interest Rate
Interest Period
Risk Category
Trade Date
Settlement Date
Calculation
Invstmnt.—Fund #
Investment Fund #
Issuer Code
Cert.Acct. #
Term of Days
ME (Month end in advance)
AE (Month end in arrears)
M (Monthly in advance)
AM (Monthly in arrears)
QE (Quarter end)
S (Semi-annual Actual)
SC (Semi -Annual Equal)
MA (Maturity)
MD (Maturity Discount)
LAW BALANCE
Comments:
Conf #:
1. Name:
2. Branch Address:
3. Telephone No.: _
4.
Primary Account Representative:
Name:
Title:
Telephone No.:
Approval:
Management Analyst:
Fin. Svcs. Manager:
Approval Date:
Transaction Date:
BROKER/DEALER QUESTIONNAIRE
CITY OF LODI TREASURER'S OFFICE
P. O. Box 3006
Lodi, California 95241
5. Is your firm a primary dealer in US Government Securities? Y/N
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6. Identify the personnel who will be trading with or quoting securities to our agencies employees:
Name Title Telephone No.
7. National Headquarters Address:
Corporate Contract:
Telephone No.:
Compliance Officer (Name, Address, Telephone):
8. What was your firm's total volume in US Government and Agency securities trading last calendar year?
9. Which securities are offered by your firm?
(
) US Treasury
(
) Commercial Paper
(
) US Treasury Notes
(
) BAs Domestic
(
) US Treasury Bonds
(
) BAs Foreign
(
) Agencies (specify)
(
) Repurchase Agreements
(
) Negotiable CD's
(
) Reverse Repurchase Agreements
10. List your personnel who have read the City of Lodi Treasurer's Investment Policy.
11. Please identify your public -sector clients in our geographical area who are most comparable to our government with
which you currently do business.
12. Have any of your clients ever sustained a loss on a securities transaction arising from misunderstanding or
misrepresentation of the risk characteristics of the instrument? If so, please explain.
13. Have any of your public -sector clients ever reported to your firm, is officers or employees, orally or in writing, that
they sustained a loss exceeding 10% of the original purchase price in a single year on any individual security purchased
thorough your firm? Explain.
14. Has your firm ever been subject to a regulatory or state/federal agency investigation for alleged improper, fraudulent,
disreputable or unfair activities related to the sale of securities? Have any of your employees ever been so
investigated? Explain.
15. Has a public sector client ever claimed in writing that your firm or members of your firm were responsible for
investment losses?
16. Please include samples of research reports that your firm regularly provides to public -sector clients.
17. Please explain your normal delivery process. Who audits these fiduciary systems?
18. Please provide certified financial statements and other indicators regarding your firm's capitalization.
19. Describe the capital line and trading limits that support/limit the office that would conduct business with our
government.
20. What training would you provide to our employees and investment officers?
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21. Has your firm consistently complied with the Federal Reserve Bank's capital adequacy guidelines? As of this date,
does your firm comply with the guidelines? Has your capital position every fallen short? By what factor (1.5x, 2x,
etc.). Does your firm presently exceed the capital adequacy guidelines, measure of risk? Include certified
documentation of your capital adequacy as measured by the Federal Reserve standards.
22. Do you participate in the Securities Investor Protection Corporation (SIPC) insurance program? If not, why?
23. What portfolio information do you require from your clients?
24. What reports, confirmations and paper trail will we receive?
25. Enclose a complete schedule of fees and charges for various transactions.
26. How many and what percentage of your transactions failed last month? Last year?
27. Describe the precautions taken by your firm to protect the interest of the public when dealing with governmental
agencies as investors.
28. Is your firm licensed by the State of California as a broker/dealer? YIN
CERTIFICATION ATTACHED
17
CERTIFICATION
I hereby certify that I have personally read the latest adopted resolution of investment policies and objectives of the City of
Lodi Treasurer and the California Government Codes pertaining to the investments of the City of Lodi, and have
implemented reasonable procedures and a system of controls designed to preclude imprudent investment activities arising
out to transaction conducted between our firm and the City of Lodi. All sales personnel will be routinely informed of the
City of Lodi's investment objectives, horizon, outlook, strategies and risk constraints whenever we are so advised. We
pledge to exercise due diligence in informing the City of Lodi of all foreseeable risks associated with financial transactions
conducted with our firm. I attest to the accuracy of our responses to your questionnaire.
SIGNED TITLE DATE
COUNTERSIGNED DATE
(Person in charge of government securities operations)
NOTE: Completion of Questionnaire is only part of the City of Lodi's Certification process and DOES NOT guarantee that
the applicant will be approved to do business with the City of Lodi.
On this day of 20 before me the
undersigned Notary Public personally appeared
( ) personally known to me
( } proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) subscribed to the within
instrument and acknowledged that executed it.
State of
County of
WITNESS my hand and official seal.
Notary's Signature
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City of Lodi
GLOSSARY
19
GLOSSARY OF COMMONLY USED FINANCIAL TERMS
AGENT: an agent is a firm or individual which executes orders for others or acts on behalf of others (the
principal). The agent is subject to the control of the principal and does not have title to the principal's property.
The agent may charge a fee or commission for this service.
AGENCIES: federal agency securities and/or Government-sponsored enterprises.
AGREEMENT: an agreement is an arrangement or understanding between individual traders to honor market
quotes within predetermined limits on dollar amount and size.
AMORTIZATION: straight-line reduction of debt by means of periodic payments sufficient to meet current
interest charges and to pay off the debt at, maturity.
ARBITRAGE: a technique used to take advantage of price differences in separate markets. This is
accomplished by purchasing securities, negotiable instruments or currencies in one market for immediate sale in
another market at a better price.
ASKED: the price at which securities are offered.
AT THE MARKET: a trading term for the buying or selling of securities at the current market price rather than
at a predetermined price.
BANKERS ACCEPTANCE (BA): a bearer time draft for a specified amount payable on a specified date. An
individual or business seeking to finance domestic or international trade draws it on a bank. Commodity
products collateralize the BA. Sale of goods is usually the source of the borrower's repayment to the bank. The
bank finances the borrower's transaction and then often sells the BA on a discount basis to an investor. At
maturity, the bank is repaid and the investor holding the BA receives par value from the bank.
BASIS PRICE: price expressed in yield -to -maturity or the annual rate of return on the investment.
BEAR MARKET: a period of generally pessimistic attitudes and declining market prices. (Compare: Bull
market)
BELOW THE MARKET: a price below the current market price for a particular security.
BID AND ASKED OR BID AND OFFER: the price at which an owner offers to sell (asked or offer) and the
price at which a prospective buyer offers to buy (bid). It is often referred to as a quotation or a quote. The
difference between the two is called the spread.
BOND: an interest-bearing security issued by a corporation, government, governmental agency or other body,
which can be executed through a bank or trust company. A bond is a form of debt with an interest rate,
maturity, and face value, and is usually secured by specific assets. Most bonds have a maturity of greater than
one year, and generally pay interest semiannually.
City of Lodi
GLOSSARY OF COMMONLY USED FINANCIAL TERMS
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BOND ANTICIPATION NOTE (BAN): short-term notes sold by states and municipalities to obtain interim
financing for projects which will eventually be financed by the sale of bonds.
BOND DISCOUNT: the difference between a bond's face value and a selling price, when the selling price is
lower than the face value.
BOND RATING: the classification of a bond's investment quality. (See: Rating).
BOND RESOLUTION: a legal order or contract by a governmental unit to authorize a bond issue. A bond
resolution carefully details the rights of the bondholders and the obligation of the issuer.
BOOK VALUE: the amount at which a security is carried on the books of the holder or issuer. The book value
is often the cost,. plus or minus amortization, and may differ significantly from the market value.
BROKER: a middleman who brings buyers and sellers together and handles their orders, generally charging a
commission for this service. In contrast to a principal or a dealer, the broker does not own or take a position in
securities.
BULL MARKET: a period of generally optimistic attitudes and increasing market prices. (Compare: Bear
Market).
BUYERS MARKET: a market where supply is greater than demand, giving buyers an advantage in purchase
price and terms.
CALL: an option to buy a specific asset at a certain price within a particular period.
CALLABLE: a feature which states a bond or preferred stock may be redeemed by the issuer prior to maturity
under terms designated prior to issuance.
CALL DATE: the date on which a bond may be redeemed before maturity at the option of the issuer.
CALLED BONDS: bonds redeemed before maturity.
CALL PREMIUM: the excess paid for a bond or security over its face value.
CALL PRICE: the price paid for a security when it is called. The call price is equal to the face value of the
security, plus the call premium.
CALL PROVISION: the call provision describes the details by which a bond may be redeemed by the issuer, in
whole or in part, prior to maturity. A Security with such a provision will usually have a higher interest rate than
comparable, but noncallable securities.
CAPITAL GAIN OR LOSS: the amount that is made or lost, depending upon the difference. between the sale
price and the purchase price of any capital asset or security.
City of Lodi
GLOSSARY OF COMMONLY USED FINANCIAL TERMS
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CAPITAL MARKET: the market in which buyers and sellers, including institutions, banks, governments,
corporations and individuals, trade debt and equity securities.
CASH SALE: a transaction calling for the delivery and payment of the securities on the same day that the
transaction takes place.
CERTIFICATE OF DEPOSIT (CD): debt instrument issued by a bank that usually pays interest. Institutional
CD's are issued in denominations of $100,000 or more. Maturities range from a few weeks to several years.
Competitive forces in the marketplace set interest rates.
CERTIFICATE OF DEPOSIT ACCOUNT REGISTRY SERVICE (CDAR ): Deposits made with a
"selected" depository institution, in accordance with California Government Code Section 53601.8. that
uses a private entity to assist in the placement of certificates of deposit. Such deposits shall at all times be
insured by the Federal Deposit Insurance Corporation or the National Credit Union Administration. The
selected de op sitory institution shall serve as custodian for each certificate of deposit that is issued with
placement service for the City of Lodi's account.
COLLATERAL: securities or other property, which a borrower pledges for the repayment of a loan. Also
refers to securities pledged by a bank to secure deposits of public monies.
COLLATERAL NOTE: a promissory note, which specifically mentions the collateral, pledged by the borrower
for the repayment of an obligation.
COMMERCIAL PAPER: short-term obligations with maturities ranging from 2 to 270 days issued by banks,
corporations, and other borrowers to investors with temporarily idle cash. Such instruments are unsecured and
usually discounted, although some are interest-bearing.
COMMISSION: the brokers or agent's fee for purchasing or selling securities for a client.
COUPON: the annual rate of interest that a bond's issuer promises to pay the bondholder on the bond's face
value.
COVENANT: a pledge in the bond resolution or indenture of the issuing government to perform in a way that
may benefit the bondholders, or to refrain from doing something that might be disadvantageous to them.
COVER: the spread between the winning bid (or offer) and the next highest bid (or the next lowest offer). It is
useful as a basis for evaluation of the bids.
COVERAGE RATIO: the ratio of income available to pay a specific obligation versus the total amount
obligated. This is a measure of financial stability.
CREDIT ANALYSIS: a.critical review and appraisal of the economic and financial condition of a government
agency or corporation. The credit analysis evaluates the issuing entity's ability to meet its debt obligations, and
the suitability of such obligations for underwriting or investment.
City of Lodi
GLOSSARY OF COMMONLY USED FINANCIAL TERMS
CURRENT MATURITY: amount of time left to the maturity of an obligation.
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DEBENTURE: a bond secured by the general credit of the issuer rather than being backed by a specific lien on
property as in mortgage bonds.
DEBT COVERAGE: this term is normally used in connection with revenue and corporate bonds. It indicates
the margin of safety for payment of debt, reflecting the number of times by which earnings for a certain period
of time exceed debt payable during the same period.
DEBT LIMIT (OR CEILING): the maximum amount of debt that can legally be acquired under the debt -
incurring power of a state or municipality.
DEBT SERVICE: interest and principal obligation on an outstanding debt. This is usually for a one-year
period.
DEFAULT: failure to pay principal or interest promptly when due.
DELIVERY VERSUS PAYMENT: securities industry procedure, common with institutional accounts,
whereby delivery of securities sold is made to the buying customer's bank in exchange for payment, usually in
the form of cash. (Institutions are required by law to require "assets of equal value" in exchange for delivery.)
Also called Cash on Delivery.
DERIVATIVE: contracts written between a City and a counter party such as a bank, insurance company or
brokerage firms. Their value is derived from the value of some underlying assets such as Treasury Bonds or a
market index such as LIBOR Derivatives are used to create financial instruments to meet special market needs.
Two contrasting reasons for the use of derivatives are: 1) to limit risk or transfer it to those willing to bear it;
and, 2) to speculate about future interest rates and leverage in hope of increasing returns.
DISCOUNT: the difference between the cost price of a security and its maturity when quoted at lower than face
value. A security selling below original offering price shortly after a sale also is considered to be at a discount.
DIVERSIFICATION: dividing investment funds among a variety of securities offering independent returns.
DUE DILIGENCE: exercising of due professional care in the performance of duties.
FACE VALUE: the principal amount owed on a debt instrument. It is the amount on which interest is
computed and represents the amount that the issuer promises to pay at maturity.
FANNIE MAE: trade name for the Federal National Mortgage Association.
FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC): federal agency established in 1933 that
guarantees (within limits) funds on deposit in member banks and performs other functions such as making loans
to or buying assets from members banks to facilitate mergers or prevent failures.
FEDERAL FUNDS RATE: the rate of interest at which Fed funds are traded. This rate is currently pegged by
the Federal Reserve through open -market operations.
City of Lodi
GLOSSARY OF COMMONLY USED FINANCIAL TERMS
FEDERAL HOME LOAN BANKS (FHLB): government sponsored wholesale banks (currently 12 regional
banks) which lend funds and provide correspondent banking services to member commercial banks, credit
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unions and insurance companies. The mission of the FHLBs is to liquefy the housing related assets of its
members who must purchase stock in their district Bank.
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA): FNMA like GNMA was chartered under the
Federal National Mortgage Association Act in 1938. FNMA is a federal corporation working under the auspices
of the Department of Housing and Urban Development (HUD). It is the largest single provider of residential
mortgage funds in the United States. Fannie Mae, as the corporation is called, is a private stockholder -owned
corporation. The corporation's purchases include a variety of adjustable mortgages and second loans, in
addition to fixed-rate mortgages. FNMA's securities are also highly liquid and are widely accepted. FNMA
assumes and guarantees that all security holders will receive timely payment of principal and interest.
FEDERAL OPEN MARKET COMMITTEE (FOMC): consists of seven members of the Federal Reserve
Board and five of the twelve Federal Reserve Bank Presidents. The President of the New York Federal Reserve
Bank is a permanent member, while the other Presidents serve on a rotating basis. The Committee periodically
meets to set Federal Reserve guidelines regarding purchases and sales of Government Securities in the open
market as a means of influencing the volume of bank credit and money.
FEDERAL RESERVE SYSTEM: the central bank of the United States created by Congress and consisting of a
seven member Board of Governors in Washington, D.C., 12 regional banks and about 5,700 commercial banks
that are members of the system.
FIDUCIARY: an individual or group, such as a bank or trust company, which acts for the benefit of another
party or to which certain property is given to hold in trust, according the trust agreement.
FISCAL YEAR: an accounting or tax period comprising any twelve-month period. The City's fiscal year starts
July 1.
FREDDIE MAC: trade name for the Federal Home Loan Mortgage Corporation.
FULL FAITH AND CREDIT: the unconditional guarantee of the United States government backing a debt for
repayment.
GENERAL OBLIGATION BONDS (GO's): bonds secured by the pledge of the municipal issuer's full faith
and credit, usually including unlimited taxing power.
GINNIE MAE: trade name for the Government National Mortgage Association.
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA or Ginnie Mae): securities influencing
the volume of bank credit guaranteed by GNMA and issued by mortgage bankers, commercial banks, savings
and loan associations, and other institutions. Security holder is protected by full faith and credit of the U.S.
Government. Ginnie Mae securities are backed by the FHA, VA or FmHA mortgages. The term "pass-
through" is often used to describe Ginnie Maes.
City of Lodi
GLOSSARY OF COMMONLY USED FINANCIAL TERMS
HOLDER: the person or entity which is in possession of a negotiable instrument.
INDEBTEDNESS: the obligation assumed by a borrower, guarantor, endorser, etc. to repay funds which have
been or will be paid out on the borrower's behalf.
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INDENTURE: a written agreement used in connection with a security issue. The document sets the maturity
date, interest rate, security and other terms for both the issue holder, issuer and, when appropriate, the trustee.
INTEREST RATE: the interest payable each year on borrowed funds expressed as a percentage of the principal.
INVESTMENT: use of capital to create more money, either through income-producing vehicles or through
more risk -oriented ventures designed to result in capital gains.
INVESTMENT PORTFOLIO: a collection of securities held by a bank, individual, institution, or government
agency for investment purposes.
IRREVOCABLE LETTER OF CREDIT: instrument or document issued by a bank guaranteeing the payment
of a customer's drafts up to a stated amount for a specified period. It substitutes the bank's credit for the buyer's
and eliminates the seller's risk. This arrangement cannot be changed or terminated by the one who created it
without the agreement of the beneficiary.
ISSUE PRICE: the price at which a new issue of securities is put on the market.
ISSUER: any corporation or governmental unit, which borrows money through the sale of securities.
JOINT AND SEVERAL OBLIGATION: a guarantee to the holder in which the liability for a bond or note
issue may be enforced against all parties jointly or any one of them individually so that one, several or all may
be held responsible for its payment.
LAIF: trade name for California State Local Agency Investment Fund.
LEGAL INVESTMENT: a list of securities in which certain institutions and fiduciaries may invest as
determined by regulatory agencies.
LEGAL OPINION: an opinion concerning the legality of a bond issue, usually written by a recognized law firm
specializing in the approval of public borrowings.
LIQUIDITY: a liquid asset is one that can be converted easily and rapidly into cash without a substantial loss of
value. In the money market, a security is said to be liquid if the spread between bid and asked prices is narrow
and reasonable size can be done at those quotes.
City of Lodi
GLOSSARY OF COMMONLY USED FINANCIAL TERMS
MARKETABILITY: the measure of ease with which a security can be sold in the secondary market.
MARKET ORDER: an order to buy or sell securities at the prevailing bid or ask price on the market.
MARKET VALUE: the price at which a security is trading and could presumably be purchased or sold.
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MARKET VS. QUOTE: quote designates the current bid and ask on a security, as opposed to the price at which
the last security order was sold.
MASTER REPURCHASE AGREEMENT: a written contract covering all fixture transactions between the
parties to repurchase—reverse repurchase agreements that establishes each parry's rights in the transactions. A
master agreement will often specify, among other things, the right of the buyer -lender to liquidate the underlying
securities in the event of default by the seller -borrower.
MATURITY: the date that the principal or stated value of debt instrument becomes due and payable. It is also
used as the length of time between the issue date and the due date.
MONEY MARKET the market in which short-term debt instruments (bills, commercial paper, bankers'
acceptances, etc.) are issued and traded.
MORTGAGE BOND: a bond secured by a mortgage on property. The value of the property used as collateral
usually exceeds that of the mortgage bond issued against it.
NEGOTIABLE: a term used to designate a security, the title to which is transferable by delivery. Also used to
refer to the ability to exchange securities for cash or near -cash instruments.
NO PAR VALUE: a security issued with no face or par value.
NON-NEGOTIABLE: a security whose title or ownership is not transferable through a simple delivery or
endorsement. (See: Negotiable.)
OBLIGATION: a responsibility for paying back a debt.
OFFER: the price of a security at which a person is willing to sell.
OFFERING: placing securities for sale to buyers. The offering usually states the price and terms.
OPEN MARKET OPERATIONS: purchases and sales of government and certain other securities in the open
market by the New York Federal Reserve Bank as directed by the FOMC in order to influence the volume of
money and credit in the economy. Purchases inject reserves into the bank system and stimulate growth of
money and credit; sales have the opposite effect. Open market operations are the Federal Reserve's most
important and most flexible monetary policy tool.
City of Lodi
GLOSSARY OF COMMONLY USED FINANCIAL TERMS
PAR VALUE: the stated or face value of a security expressed as a specific dollar amount marked on the face of
the security; the amount of money due at maturity. Par value should not be confused with market value.
PAYING AGENT: the agency, usually a commercial bank, which dispenses the principal and interest payable
on a maturing issue.
PORTFOLIO: the collection of securities held by an individual or institution.
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PREMIUM: the amount by which the price paid for a security exceeds the par value. Also, the amount that
must be paid over the par value to call an issue before maturity.
PRIMARY DEALER: a group of government securities dealers who submit daily reports of market activity and
positions and monthly financial statements to the Federal Reserve Bank of New York and are subject to its
informal oversight. Primary dealers include Securities and Exchange Commission (SEC) -registered securities
broker-dealers, banks, and a few unregulated firms.
PRINCIPAL: the face or par value of an instrument. It does not include accrued interest.
PRUDENT INVESTOR RULE: an investment standard adopted by the State of California in 1995. It states that
a trustee shall consider the entire investment portfolio when determining the prudence of an individual
investment; diversification is explicitly required within a portfolio; suitability of an investment is a primary
determinant; and delegation of investment management is acceptable.
PRUDENT MAN RULE: an investment standard established in 163 Q. It states that a trustee who is investing
for another should behave in the same way as a prudent individual of discretion and intelligence who is seeking
a reasonable income and preservation of capital.
QUOTATION (QUOTE): the highest bid to buy or the lowest offer to sell a security in any market at a
particular time.
RATE OF RETURN: 1) the yield which attainable on a security based on its purchase price or its current
market price. 2) This may be the amortized yield to maturity on a bond the current income returns.
RATING: the designation used by investors' services to rate the quality of a security's creditworthiness.
Moody's ratings range form the highest Aaa, down through Aa, A, Baa, Ba, B, etc., while Standard and Poor's
ratings range from the highest AAA, down through AA, A, BBB, BB, B, etc.
REFINANCING: rolling over the principal on securities that have reached maturity or replacing them with the
sale of new issues. The object may be to save interest costs or to extend the maturity of the loan.
REGISTERED BOND: a bond whose principal and/or interest is payable only to that person or organization
which is registered with the issuer. This form is not negotiable and it can be transferred only when endorsed by
the registered owner.
City of Lodi
GLOSSARY OF COMMONLY USED FINANCIAL TERMS
REPURCHASE AGREEMENT (REPO): agreement between a seller and a buyer, usually of U.S. Government
securities, whereby the seller agrees to repurchase the securities at an agreed upon price and, usually, at a stated
time. The attraction of repos is the flexibility of maturities that makes them an ideal place to "park" funds on a
very temporary basis. Dealers also arrange reverse repurchase agreements, whereby they agree to buy the
securities and the investor agrees to repurchase them at a later date.
REVENUE ANTICIPATION NOTES (RAN): short-term notes sold in anticipation of receiving future
revenues. The notes are to be paid from the proceeds of those revenues.
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REVENUE BOND: a state or local bond secured by revenues derived from the operations of specific public
enterprises, such as utilities. Such bonds are not generally backed by the taxation power of the issuer unless
otherwise specified in the bond indenture.
SAFEKEEPING: a service banks offer to customers for a fee, where securities are held in the bank's vaults for
protection.
SECURED DEPOSIT: bank deposits of state or local government funds which, under the laws of certain
jurisdictions, must be secured by the pledge of acceptable securities.
SECONDARY MARKET: a market made for the purchase and sale of outstanding issues following the initial
distribution.
SECURED DEPOSIT: bank deposits of state or local government funds which, under the laws of certain
jurisdictions, must be secured by the pledge of acceptable securities.
SECURITIES: investment instruments such as bonds, stocks and other instruments of indebtedness or equity.
SECURITIES & EXCHANGE COMMISSION: agency created by Congress to protect investors in securities
transactions by administering securities legislation.
SERIAL BOND: bonds of the same issue, which have different maturities, coming due over a number of years
rather than all at once. This allows the issuer to retire the issue in small amounts over a long period of time.
SETTLEMENT DATE: date by which an executed order must be settled, either by buyer paying for the
securities with cash or by a seller delivering the securities and receiving the proceeds of the sale for them.
SRgKING FUND: a reserve fund set aside over a period of time for the purpose of liquidating or retiring an
obligation, such as a bond issue, at maturity.
SPECIAL ASSESSMENT BONDS: bonds that are paid back from taxes on the property that is benefiting from
the improvement being financed. The issuing governmental entity agrees to make the assessments and earmark
the tax proceeds to repay the debt on these bonds.
SPREAD: the difference between two figures or percentages. For example, it may be the difference between
the bid and asked prices of a quote, or between the amount paid when bought and the amount received when
sold.
City of Lodi
GLOSSARY OF COMMONLY USED FINANCIAL TERMS
TAX ANTICIPATION NOTES (TAN): short-term notes issued by states or municipalities to finance current
operations in anticipation of future tax collections which would be used to repay the debt.
TAX-EXEMPT BONDS: interest paid on municipal bonds issued by state and local governments or agencies is
usually exempt fromfederal taxes, and in some cases, the state and/or local taxes. The interest rate paid on
these bonds is generally lower than rates on non-exempt securities.
TERMS: the conditions of the sale or purchase of a security.
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TREASURY BILL (T -BILL): a non-interest bearing discount security issued by the U.S. Treasury to finance
the national debt. Most bills are issued to mature in three months, six months, or one year.
TREASURY BONDS AND NOTES: obligations of the U. S. government which bear interest. Notes have
maturities of one to seven years, while bonds have longer maturities.
TREASURY BONDS: long-term coupon bearing U.S. Treasury securities issued as direct obligations of the
U.S. Government and having initial maturities of more than 10 years.
TREASURY NOTES: medium-term coupon -bearing U.S. Treasury securities issued as direct obligations of the
U.S. Government and having initial maturities from two to 10 years.
TRUSTEE: a bank designated as the custodian of funds and the official representative for bondholders.
UNDERWRITER: a dealer bank or other financial institution, which arranges for the sale and distribution of a
large batch of securities and assumes the responsibility for paying the net purchase price.
UNIFORM NET CAPITAL RULE: Securities and Exchange Commission requirement that member firms as
well as nonmember broker-dealers in securities maintain a maximum ratio of indebtedness to liquid capital of 15
to 1; also called net capital rule and net capital ratio. Indebtedness covers all money owed to a firm, including
margin loans and commitments to purchase securities, one -reason new public issues are spread among members
of underwriting syndicates. Liquid capital includes cash and assets easily converted into cash.
YIELD: the annual rate of return on an investment, expressed as a percentage of the investment.
YIELD CURVE: graph showing the term structure of interest rates by plotting the yields of all bonds of the
same quality with maturities ranging from the shortest to the longest available. The resulting curve shows if
short-term interest rates are higher or lower than long-term rates. For the most part, the yield curve is positive
(short-term rates are lower), since investors who are willing to tie up their money for a longer period of time
usually are compensated for the extra risk they are taking by receiving a higher yield.
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