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San Leandro Investment Policy Statement Page 13 of 15 <br />COLLATERAL. Securities or cash pledged by a borrower to secure repayment of a loan or repurchase <br />agreement. Also, securities pledged by a financial institution to secure deposits of public <br />monies. <br />COLLATERALIZED MORTGAGE OBLIGATIONS (CMO). Classes of bonds that redistribute the cash flows <br />of mortgage securities (and whole loans) to create securities that have different levels of <br />prepayment risk, as compared to the underlying mortgage 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. Because it does <br />not give effect to premiums and discounts which may have been included in the purchase <br />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 timely <br />manner due to changes in the condition of the issuer. <br />CURRENT YIELD. The annual income from an investment divided by the current market value. Since <br />the mathematical calculation relies on the current market value rather than the investor’s <br />cost, current yield is unrelated to the actual return the investor will earn if the security is held <br />to maturity. <br />DEALER. A dealer acts as a principal in security transactions, selling securities from and buying <br />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 security must <br />be made at the time the security is delivered to the purchaser’s 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, or any <br />security which represents a component of another security which has been separated from <br />other components (“Stripped” coupons and principal). A derivative is also defined as a <br />financial instrument the value of which is totally or partially derived from the value of another <br />instrument, interest rate, or index. <br />DISCOUNT. The difference between the par value of a bond and the cost of the bond, when the cost <br />is below par. Some short-term securities, such as T-bills and banker’s acceptances, are <br />known as discount securities. They sell at a discount from par, and return the par value to <br />the investor at maturity without additional interest. Other securities, which have fixed <br />coupons, trade at a discount when the coupon rate is lower than the current market rate for <br />securities of that maturity and/or quality. <br />DIVERSIFICATION. Dividing investment funds among a variety of investments to avoid excessive <br />exposure to any one source of risk. <br />DURATION. The weighted average time to maturity of a bond where the weights are the present <br />values of the future cash flows. Duration measures the price sensitivity of a bond to changes <br />in interest rates. (See modified duration). <br />FEDERAL FUNDS RATE. The rate of interest charged by banks for short-term loans to other banks. <br />The Federal Reserve Bank through open-market operations establishes it. <br />FEDERAL OPEN MARKET COMMITTEE. A committee of the Federal Reserve Board that establishes <br />monetary policy and executes it through temporary and permanent changes to the supply of <br />bank reserves. <br />LEVERAGE. Borrowing funds in order to invest in securities that have the potential to pay earnings <br />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 entities <br />and certain non-profit organizations in California that is managed by the State Treasurer’s <br />Office. <br />LOCAL GOVERNMENT INVESTMENT POOL. Investment pools that range from the State Treasurer’s <br />Office Local Agency Investment Fund (LAIF) to county pools, to Joint Powers Authorities <br />(JPAs). These funds are not subject to the same SEC rules applicable to money market <br />mutual funds. <br /> <br /> <br /> 36