Index: Finance & Information Services

Number: 210-07

Effective Date





1 of 15

Staff Contact

Iwen Wang

Approved By

Denis Law


To establish policy and procedure for the investment of excess or inactive City funds.


This investment policy applies to the investment of available City funds excluding fire pension funds.


City of Renton Ordinance No 5079;

Council Meeting Minutes of 6/5/2006; and 2/23/2009;

RCW 35.39.030;

RCW 36.29.020, as amended; and

RCW 39.58.080, as amended.


4.1    The primary objectives of this policy, in order of priority, of the City of Renton's investment activities shall be:

4.1.1    Safety: Safety of principal is the foremost objective of the City of Renton. Investments of the City shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. To attain this objective, diversification and safekeeping are required in order that potential losses on individual securities do not exceed the income generated from the remainder of the portfolio.

4.1.2    Liquidity: The City's investment portfolio will remain sufficiently liquid to enable the City to meet all operating requirements that might be reasonably anticipated.

4.1.3    Return on Investment: The City's investment portfolio shall be designed with the objective of attaining a market rate of return throughout budgetary and economic cycles, taking into account legal limitations, the City's investment risk constraints, and the cash flow characteristics of the portfolio.

4.2    The City has a responsibility in the investment of public funds to seek the highest rate of return available in the market consistent with the primary requirements of legality, safety, liquidity, and return on investment in that order.

4.3    The City of Renton's investment portfolio will strive to achieve a market average rate of return during budgetary and economic cycles, taking into account the City's investment risk constraints and cash flow needs. Market average shall be defined as the average return on U.S. Treasury index selected by the Investment Committee that appropriately reflects the risk and return profile of the City. The appropriate index shall take into consideration the benchmark for traditional public funds management and an analysis of the City’s portfolio characteristics (core funds, liquid funds, etc).

4.4    Rate speculation will not be a criterion for the selection of an investment. Other criteria, including safety, cash flow, market rates of return, and maturity take preference to rate expectations.


5.1    Delegation of Authority

5.1.1    The Investment Policy of the City of Renton shall be approved by the City Council and made available on its web site, and upon request. The Finance Committee of the City Council shall review the policy at their discretion and recommend suggested changes to the full City Council.

5.1.2    The City Investment Committee shall provide oversight of the investment program. The Committee shall meet quarterly to review reports and actions taken within the City’s portfolio. The Committee shall provide advice and direction for the management of the City investment program. The Committee shall be comprised of the Mayor, the Chief Administrative Officer, the Finance and Information Services Administrator, and a member of the City Council.

5.1.3    The Finance and Information Services Administrator is responsible for managing the investment program, with execution of investment transactions delegated to the Fiscal Services Director who shall act as the City’s Investment Officer, consistent with procedures established in this policy. The City, with concurrence of the Investment Committee, may hire an investment advisor, on a non-discretionary basis, to assist with the management of the City’s investment portfolio.

5.1.4    The daily operational responsibility for the investment program is delegated to the Fiscal Services Director who shall be responsible for all transactions undertaken. Subordinates within the Fiscal Services Director's office, authorized by City of Renton by Resolution, may be given daily responsibilities to execute specific investments in accordance with all laws, policies, procedures, and directions established under this policy. No person may engage in an investment transaction except as provided under the terms of this policy and the procedures established by the Finance and Information Services Administrator.

5.1.5    The Finance and Information Services Administrator shall be responsible for all transactions undertaken and shall establish a system of controls to regulate the activities of subordinate officials.

5.2    Prudence

5.2.1    The standard of prudence to be applied by the Investment Officer shall be the prudent investor standard that states: "Investments shall be made with judgment and care, under circumstances then prevailing, which persons of prudence, discretion, and intelligence would use in the management of their own affairs, not for speculation, but for investment purposes, considering the probable safety of their capital as well as the probable income to be derived."

5.2.2    The Investment Officer, acting in accordance with the prudent investor standard, written procedures and exercising due diligence, shall not be held personally responsible for a specific security's credit risk or market price changes, provided that these deviations are reported immediately and that appropriate action is taken to control adverse developments.

5.2.3    Employees involved in the City’s investments shall recognize that the investment policies and portfolio are subject to public review and evaluation. The overall program shall be designed and managed with a degree of professionalism that is worthy of the public trust.

5.3    Ethics and Conflicts of Interest

5.3.1    Employees involved in the investment process shall refrain from personal business activity that could conflict with proper execution of the investment program, or which could impair their ability to make impartial investment decisions in conformance with City of Renton Policy and Procedure 100-07. Employees involved in the investment process shall disclose to the Mayor and the State of Washington any material financial interests in financial institutions that conduct business with this jurisdiction, and they shall further disclose any large personal financial/investment positions that could be related to the performance of the City's portfolio. Employees shall separate their personal investment transactions from those of the City, particularly with regard to the time of purchases and sales.

5.4    Internal Controls

5.4.1    The Finance and Information Services Administrator shall establish a controlled environment that shall be reviewed annually by the State Auditor. Such review may result in recommendations to change operating procedures to improve the controlled environment. The controls shall be designed to prevent loss of public funds due to fraud, error, misrepresentation, or imprudent actions.

5.5    Monitoring and Adjusting the Portfolio

5.5.1    The Investment Officer will routinely monitor the contents of the portfolio, the available markets, and the relative values of competing instruments. Future purchase of securities will be made based, in part, upon these observations, and the advice and guidance of the Investment Committee.

5.6    Reporting Requirements

5.6.1    The Investment Officer will generate daily and monthly reports for management purposes. In addition, a quarterly report will be prepared for the Mayor and City Council outlining investment activity and return including a summary of status of the portfolio, book value and market value of securities held, unrealized gains and losses, book yield, and average yields compared to established performance standards.

5.7    Authorized Investments

5.7.1    City of Renton funds may be legally invested in any of the securities identified as eligible investments as defined by RCW 35A.40.050 "Fiscal - Investment of Funds," as interpreted by the most current edition of the Office of the State Treasurer, State of Washington publication titled "Eligible Investments for Public Funds.”

5.7.2    Repurchase Agreements entered into by the City of Renton must have as collateral U.S. Treasury securities or guaranteed federal agency obligations. Such collateral must equal or exceed 102 percent of the purchase price. For long term repos, collateral must be marked to market daily and the repurchase agreement must include provisions to make up any deficiencies. A master repurchase agreement shall be developed that spells out the nature of the agreement, remedies in the event of default by either party, and provisions requiring that the collateral securities are delivered to the City of Renton, or to an approved third party custodian prior to transfer of funds.

5.7.3    Reverse Repurchase Agreements are not permitted unless approved in writing by the Mayor of the City of Renton, and with the advice and consent of the Council by passage of a formal resolution approving such transaction.

5.7.4    Derivatives, or securities that derive security value and/or yield from an underlying asset or an external index are prohibited unless they fall into one of the following categories:

1)    Zero coupon treasury instruments

2)    Agency security obligations that have call features

3)    Agency security obligations that step-up in coupon value at pre-determined intervals. Agency obligations that step-up may also have call features

4)    Agency obligations that float with interest rates or external indexes such as treasury bills, LIBOR, COFI, or the Federal Funds rate. Agency obligation inverse floaters are prohibited.

Examples of the exceptions listed above, which are permitted investments, are as follows:

1)    Zero coupon treasury bonds.

2)    Federal Home Loan Bank Bonds that are callable on certain dates throughout the life of the bond with a final maturity date of the bond known at the time of purchase. Callable issues offer higher rates of interests because of the risk associated with the bonds potentially being called before the final maturity date. If these bonds are called, the par value of the bonds is returned to the purchaser.

3)    Federal Home Loan Bank Bonds that have a step-up feature increase in coupon value at pre-determined intervals. Normally, step-up bonds change in coupon value once a year. These bonds may also have call features.

4)    Federal National Mortgage Association Bonds that float with external index such as the Federal Funds Rate. These bonds are purchased to protect against increasing interest rates. These bonds usually adjust quarterly to their index.

Treasury instruments that are considered derivatives will not exceed 20 percent of the total treasury instrument portion of the general governmental portfolio. Agency security obligations that are considered derivatives will not exceed 50 percent of the agency security obligation portion of the general governmental portfolio. This prohibition on derivatives includes collateralized mortgage obligations and any security obligation that the maturity date is not established at the time of purchase.

5.8    Authorized Financial Dealers and Authorized Financial Dealers and Institutions

5.8.1    The Investment Officer will maintain a list of financial institutions as required by the Public Deposit Commission, authorized to provide investment services. In addition, a list will also be maintained of approved security broker/dealers selected by credit worthiness, who maintain an office in the State of Washington. These may include primary dealers or regional dealers that qualify under SEC Rule 15C3-1 (uniform net capital rule). No public deposit shall be made except in a qualified public depository with offices located in the State of Washington.

5.8.2    Employees of any firm or financial institution offering securities to the City of Renton are expected to have both Series 7 and Series 63 licenses and be trained in the precautions appropriate to public-sector investments. These firms and financial institutions are expected to familiarize themselves with the City of Renton’s investment objectives, policies and constraints. In addition, these firms and financial institutions are expected to take reasonable efforts to preclude imprudent transactions involving the City of Renton’s funds.

5.9    Quotes and Selection of Investment Instruments

5.9.1    Except in the case of the Local Government Investment Pool (LGIP), before the City invests any surplus funds, a competitive quote process shall be conducted. If a specific maturity date is desired for cash flow purposes, quotes will be requested for instruments that meet the maturity requirement. If no specific maturity is required, a market trend (yield curve) analysis will be conducted to determine which maturity would be most advantageous.

5.9.2    Quotes will be requested from at least three previously qualified Authorized Dealers. The quotes will evaluate various options with regards to term and instrument. The City will accept the quote that provides the best alignment with these policies, including diversification as defined by the Investment Committee. Records shall be kept of the quotes offered, (until the financial audit is completed for the year), the quotes accepted and a brief explanation of the decision that was made regarding the investment. The Investment Committee shall review such activity.

5.10    Term of Investments

5.10.1    The City will attempt to match its investments with anticipated cash flow requirements. Unless matched to a specific cash flow, the City will not directly invest in securities maturing more than ten years from the date of purchase. The average weighted life of the City’s portfolio shall not be more than 30 months without express written and unanimous approval of the Investment Committee. Where the Committee provides authority to extend the average life of the portfolio, it shall state the parameters that shall govern in lieu of this policy limit, including a time during which this exception shall be in force.

5.10.2    The City may sell or exchange securities, at their option, to maintain liquidity or upgrade yield. Such actions may be initiated by the Investment Officer, and requires the written concurrence of the Investment Committee.

5.11    Diversification

5.11.1    The City will diversify use of investment instruments to avoid incurring unreasonable risks inherent in over-investing in specific instruments, individual financial institutions or maturity dates. The diversification will consider the market climate and cash flow demand at the time of investment in that the instruments selected will be the most advantageous for the City without exceeding the maximum limitations set forth below. The target distribution will guide investment decisions during normal economic time.

Target Portfolio Distribution by Investment

•    US Treasury Securities         0%

•    WA State Local Government Investment Pool         40%

•    US Federal Agency Securities         30%

•    Certificates of Deposit (within PDPC)         30%

•    Commercial Paper         0%

Total Portfolio                        100%

•    Maximum constraints by Instrument

•    US Treasury Securities        100%

•    WA State Local Government Investment Pool         75%

•    US Federal Agency Securities         75%

•    Certificates of Deposit (within PDPC)         75%

•    Commercial Paper         25%

•    Distribution by Institution (Issuer)

•    US Treasury Securities        100%

•    WA State Local Government Investment Pool         75%

•    US Federal Agency Securities         50%

•    Certificates of Deposit (within PDPC)         20%

•    Commercial Paper         5%

Non-compliance to any of the limitations during a period of transition will be acceptable when a change is made to the portfolio allocation.

For purposes of this policy, federal agency debt shall be subject to the 25 percent rule and shall be considered on an agency-by-agency basis. The single financial institution limitation means direct investments in that institution (such as Certificates of Deposit) and shall not apply to investments in other institutions made via an institution.

5.11.2    Portfolio maturity shall be staggered to avoid undue concentration of assets in a specific maturity sector and to mitigate reinvestment risk. Maturity selected shall provide for stability of income and reasonable liquidity in view of cash flow projections.

5.12    Safekeeping and Custody

5.12.1    All security transactions, including collateral for repurchase agreements, entered into by the City of Renton shall be conducted on a delivery-versus-payment (DVP) basis. A third party custodian designated by the Finance and Information Services Administrator will hold securities. Certificates of Deposit will be delivered to and held by the Finance Department.

5.12.2    It is the intent of the City of Renton to select the primary bank for such services as bank depository, warrant processing and custodial services through a bid process. These services may be bid separately or together, depending on what is in the City of Renton's best interest.


ACCRUED INTEREST: The interest accumulated on a bond since issue date or the last coupon payment. The buyer of the bond pays the market price and accrued interest, which is payable to the seller.

AGENCY SECURITY OBLIGATIONS: U.S. Government issued security that was not issued by the Treasury Department. These issues include: Federal Home Loan Bank Bonds (FHLB), Federal National Mortgage Association (FNMA), Federal Farm Credit Bank (FFCB), Federal Home Loan Bank Mortgage Corporation (FHLMC), and Student Loan Marketing Association (SLMA).

AVERAGE MATURITY: A weighted average of the expiration dates for a portfolio of debt securities. An income fund’s volatility can be managed by shortening or lengthening the average maturity of its portfolio.

BANK WIRE: A virtually instantaneous electronic transfer of funds between two financial institutions.

BANKERS ACCEPTANCE (BAs): Bankers Acceptances generally are created based on a letter of credit issued in a foreign trade transaction. They are used to finance the shipment of commodities between countries as well as the shipment of some specific goods within the United States. BAs are short-term, non-interest-bearing notes sold at a discount and redeemed by the accepting bank at maturity for full face value. These notes trade at a rate equal to or slightly higher than Certificates of Deposit (CDs), depending on market supply and demand.

Bankers Acceptances are sold in amounts that vary from $100,000 to $1,000,000 or more with maturities ranging from 30 - 270 days. They offer liquidity to the investor, as it is possible to sell BAs prior to maturity at the current market price.

BASIS POINT: A measure of an interest rate, i.e., 1/100 of 1 percent, or .001.

BOND: A long-term debt security, or IOU, issued by a government or corporation that generally pays a stated rate of interest and returns the face value on the maturity date.

BOOK ENTRY SECURITIES: U.S. Government and federal agency securities that do not exist in definitive (paper) form; they exist only in computerized files maintained by the Federal Reserve Bank.

BOOK VALUE: The amount at which an asset is carried on the books of the owner. The book value of an asset does not necessarily have a significant relationship to market value.

CALLABLE AGENCY OBLIGATION SECURITY: A condition of an agency obligation security permitting the issuer to redeem it, before maturity, on specified dates.

CERTIFICATES OF DEPOSIT: Certificates of Deposit, familiarly known as CDs, are certificates issued against funds deposited in a bank for a definite period of time and earning a specified rate or return. Certificates of Deposit bear rates of interest in line with money market rates current at the time of issuance.

COMPETITIVE QUOTE PROCESS: A process by which three or more institutions are contacted via the telephone to obtain interest rates for specific securities.

COLLATERALIZED MORTGAGE OBLIGATION: Derivative security created by dividing the cash flows of a pool of mortgages into obligations having different maturities than the mortgages. CMOs are risky because of the relationship between interest rates and mortgage prepayments. When interest rates fall more mortgages are paid off, impacting the cash flows of CMOs and overall return.

CREDIT RISK: The risk that another party to an investment transaction will not fulfill its obligations. Credit risk can be associated with the issuer of a security, a financial institution holding the entity’s deposit, or a third party holding securities or collateral. Credit risk exposure can be affected by a concentration of deposits or investments in any one investment type or with any one party.

CUSTODIAN: An independent third party (usually bank or trust company) that holds securities in safekeeping as an agent for the City.

DEFEASE: To discharge the lien of an ordinance, resolution, or indenture relating to a bond issue, and in the process, rendering inoperative restrictions under which the issuer has been obliged to operate. Comment: ordinarily an issuer may defease an indenture requirement by depositing with a trustee an amount sufficient to fully pay all amounts under a bond contract as they become due.

DELIVERY: The providing of a security in an acceptable form to the City or to an agent acting on behalf of the City and independent of the seller. Acceptable forms can be physical securities or the transfer of book entry securities. The important distinction is that the transfer accomplishes absolute ownership control by the City.

DELIVERY vs. PAYMENT: There are two methods of delivery of securities: delivery vs. payment and delivery vs. receipt (also called free). Delivery vs. payment is delivery of securities with an exchange of money for the securities. Delivery vs. receipt is delivery of securities with an exchange or a signed receipt for the securities.

DEPOSITARY BANK: A local bank used as the point of deposit for cash receipts.

DEPOSITARY INSURANCE: Insurance on deposits with financial institutions. For purposes of this policy statement, depositary insurance includes: a) Federal depositary insurance funds, such as those maintained by the Federal Deposit Insurance Corporation (FDIC) and Federal Savings and Loan Insurance Corporation (FSLIC); and b) Public Deposit Protection Commission.

DERIVATIVE: A financial instrument whose value is based on, and determined by, another security or benchmark.

DISCOUNT: 1. (n.) selling below par; e.g., a $1,000 bond sell for $900. 2. (v.) anticipating the effects of news on a security’s value; e.g., “the market had already discounted the effect of the labor strike by bidding the company’s stock down.”

DIVERSIFICATION: Dividing available funds among a variety of securities and institutions so as to minimize market risk.

EFFECTIVE RATE: The yield you would receive on a debt security over a period of time taking into account any compounding effect.

FACE VALUE: The value of a bond stated on the bond certificate; thus, the redemption value at maturity. Most bonds have a face value, or par, of $1,000.

FEDERAL AGENCY SECURITIES: Several government-sponsored agencies, in recent years, have issued short and long-term notes. Such notes typically are issued through dealers, mostly investment banking houses. These Federal government-sponsored agencies were established by the U.S. Congress to undertake various types of financing without tapping the public treasury. In order to do so, the agencies have been given the power to borrow money by issues securities, generally under the authority of an act of Congress. These securities are highly acceptable and marketable for several reasons, mainly because they are exempt from state, municipal and local income taxes. Furthermore, agency securities must offer a higher yield than direct Treasury debt of the same maturity to find investors, partly because these securities are not direct obligations of the Treasury. The main agency borrowing institutions are the Federal National Mortgage Association (FNMA), the Federal Home Loan Bank System (FHLB), and the Federal Farm Credit System (FFCS).

FNMA: FEDERAL NATIONAL MORTGAGE ASSOCIATION - issues notes tailored to the maturity need of the investor. Maturities range from 30 days up to 10 years. These notes are made attractive by their denominations from $5,000 to $1 million.

FHLB: FEDERAL HOME LOAN BANK SYSTEM - consists of twelve Federal Home Loan Banks, issues, in addition to long-term bonds, coupon notes with maturities of up to one year. Their attractiveness stems from their investment denominations of $10,000 to $1 million.

FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC): A Federal institution that insures bank deposits. The current limit is up to $100,000 per deposit.

FEDERAL FUNDS RATE: The rate of interest at which Fed Funds are traded between banks. Fed Funds are excess reserves held by banks that desire to invest or lend them to banks needing reserves. The particular rate is heavily influenced through the open market operations of the Federal Reserve Board. Also referred to as the “Fed Funds rate.”

FEDERAL HOME LOAN BANKS (FHLB): The institutions that regulate and lend to savings and loan associations.

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 widely accepted. FNMA assumes and guarantees that all security holders will receive timely payment of principal and interest.

FEDERAL RESERVE SYSTEM: The central bank of the United States that has regulated credit in the economy since its inception in 1913. Includes the Federal Reserve Bank, 14 district banks and the member banks of the Federal Reserve, and is governed by the Federal Board.

FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION (FSLIC): A federal institution that insures savings and loan deposits. The current limit is up to $100,000 per deposit.

FLEXIBLE REPURCHASE AGREEMENTS (Flex Repos): Similar to a term repurchase agreement, a flex repo is a contractual transfer of U.S. Government securities during the investment period, whereby the Seller agrees to repurchase the collateral securities from the Buyer on the Buyer’s demand, subject to provisions of the agreement. The Seller is generally a financial institution such as a securities dealer or a bank. As buyers, most issuers require over collateralization, marking-to-market of collateral and delivery-vs.-payment of collateral.

FLOATER: A floating rate derivative security in which the interest rate varies with an index such as T-bills.

FLOATER (AGENCY OBLIGATION SECURITY): A condition of an agency obligation security where the coupon value of interest is determined from an external index or interest rate.

GINNIE MAES (GNMAs): Mortgage securities issued and guaranteed, as to timely interest and principal payments, by the Government National Mortgage Association, an agency within the Department of Housing and Urban Development (HUD).

GOVERNMENT SECURITY: Any debt obligations issued by the U.S. Government, its agencies or instrumentalities. Certain securities, such as Treasury bonds and Ginnie Maes, are backed by the government as to both principal and interest payments. Other securities, such as those issued by the Federal Home Loan Mortgage Corporation, or Freddie Mac, are backed by the issuing agency.

INVERSE FLOATER: Structured notes or derivatives designed to rise in yield as interest rates fall. Also called Reverse Floater. This is an extremely volatile security.

INVESTMENT OFFICER: The City of Renton Fiscal Services Director (or designee), who is responsible for the day-to-day activity of the City’s investment program.

LIQUIDATION: Conversion into cash.

LIQUIDITY: Refers to the ease and speed with which an asset can be converted into cash without a substantial loss in value.

LOSS: The excess of the cost or book value of an asset over selling price.

LOCAL GOVERNMENT INVESTMENT POOL (LGIP): The aggregate of all funds from political subdivisions that are placed in the custody of the State Treasurer for investment and reinvestment.

MARKETABILITY: Ability to sell large blocks of money market instruments quickly and at competitive prices.

MARKET VALUE: The price at which a security is trading and could presumably by sold.

MARKET RISK: The risk that the market value of an investment, collateral protecting a deposit, or securities underlying a repurchase agreement will decline.

MASTER AGREEMENT: An agreement that is controlling over all transactions covered by it on an open-ended basis. A new contract is not required for each new transaction.

MATURITY: The date upon which the principal or stated value of an investment becomes due.

PAR VALUE: The nominal or face value of a debt security; that is, the value at maturity.

PREMIUM: The amount by which a bond sells above its par value.

PRIMARY DEALERS: A group of government securities dealers that 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.

PRIME RATE: The interest rate a bank charges on loans to its most creditworthy customers. Frequently cited as a standard for general interest rate levels in the economy.

PRINCIPLE: An invested amount on which interest is charged or earned.

QUALIFIED PUBLIC DEPOSITARY: A financial institution that does not claim exemption from the payment of any sales, or compensating use or ad valarem taxes under the laws of this state, which has been segregated for the benefit of the commission eligible collateral having a value of not less than its maximum liability, and which has been approved by the Public Deposit Protection Commission to hold public deposits.

REGISTERED SECURITY: A security that has the name of the owner written on its face. A registered security cannot be negotiated except by the endorsement of the owner.

REPURCHASE AGREEMENT (REPO): A Repo is a contractual transaction between an investor and an issuing financial institution (not a secured loan). The investor exchanges cash for temporary ownership of specific securities, with an agreement between the parties that on a future date, the financial institution will repurchase the securities at a prearranged price. An “Open Repo” does not have a specified repurchase date and the repurchase price is established by a formula computation.

REPRICING: The revaluation of the market value of securities.

REVERSE REPOs: The opposite of the transaction undertaken through a regular repurchase agreement. In a “reverse” the City initially owns securities and the bank or dealer temporarily exchanges cash for this collateral. This is, in effect, temporarily borrowing cash at a high interest rate. Most typically, a Repo in initiated by the lender of funds. Reverses are used by dealers to borrow securities they have shorted. Such investments are not authorized in the City of Renton’s Investment Policy.

SAFEKEEPING: A service to customers rendered by banks for a fee whereby all securities and valuables of all types and descriptions are held in the bank’s vaults for protection, or in the case of book entry securities, are held and recorded in the customer’s name and are inaccessible to anyone else.

SALLIE MAES: Pooling of student loans guaranteed by the Student Loan Mortgage Associations (SLMA) to increase the availability of education loans. The SLMA purchases the loans after buying them on the secondary market from lenders. SLMA stock is publicly traded.

SECURITIES: Bonds, notes, mortgages, or other forms of negotiable or non-negotiable instruments.

SETTLEMENT DATES: The day on which payment is due for a securities purchase. For stocks and mutual funds bought through an investment dealer, settlement is normally five business days after the trade date. Bonds and options normally settle one business day after the trade date mutual fund shares purchased directly by mail or wire settle on the day payment is received.

STEP-UP AGENCY OBLIGATION SECURITY: A condition of an agency obligation security where the coupon value of interest increases at pre-determined intervals.

STRIPPED TREASURIES: U.S. Treasury debt obligations in which brokerage houses, creating zero-coupon bonds, remove coupons.

THIRD-PARTY SAFEKEEPING: A safekeeping arrangement whereby the investor has full control over the securities being held and dealer or bank investment department has no access to the securities being held.

TIME DEPOSIT: Interest-bearing deposit at a savings institution that has a specific maturity.

TREASURY BILLS: Treasury bills are short-term debt obligations of the U.S. Government. They offer maximum safety of principal since they are backed by the full faith and credit of the United States Government. Treasury bills, commonly called “T-Bills,” account for the bulk of government financing, and are the major vehicle used by the Federal Reserve System in the money market to implement national monetary policy. T-Bills are sold in three, six, nine, and twelve-month bills. Because treasury bills are considered “risk-free,” these instruments generally yield the lowest returns in the major money market instruments.

TREASURY NOTES AND BONDS: While T-Bills are sold at a discount rate that established the yield to maturity; all other marketable treasury obligations are coupon issued. These include Treasury Notes with maturities from one to ten years and Treasury Bonds with maturities of 10-30 years. The instruments are typically held by banks and savings and loan associations. Since Bills, Notes, and Bonds are general obligations of the U.S. Government, and since the Federal Government has the lowest credit risk of all participants in the money market, its obligations generally offer a lower yield to the investor than do other securities of comparable maturities.

UNDERLYING SECURITIES: Securities transferred in accordance with a repurchase agreement.

U.S. GOVERNMENT AGENCY SECURITIES: A variety of securities issued by several U.S. agencies. Some are issued on a discount basis and some are issued with coupons. Some are backed by the full faith and credit guarantee of the U.S. Government, while others are not.

WHEN-ISSUED TRADES: Typically there is a lag between the time a new bond is announced and sold and the time is actually issued. During this interval, the security trades “wi” -- “when, as, and if issued.”

WI: When, as, and if issued. See When-issued trades.

YIELD: The rate at which an investment pays out interest or dividend income, expressed in percentage terms and calculated by dividing the amount paid by the price of the security and annualizing the result.

YIELD BASIS: Stated in terms of yield as opposed to price. As yield increases for a traded issue, price decreases and vice versa. Charts prepared on a yield basis appear exactly opposite of those prepared on a price basis.

YIELD SPREAD: The variation between yields on different types of debt securities; generally a function of supply and demand, credit quality and expected interest rate fluctuations. Treasury bonds, for example, because they are so safe, will normally yield less than corporate bonds. Yields may also differ on similar securities with different maturities. Long-term debt, for example, carries more risk of market changes and issuer defaults than short-term debt and thus usually yields more.

ZERO-COUPON BONDS: Securities that do not pay interest but are instead sold at a deep discount from face value. They rise in price as the maturity date nears and are redeemed at face value upon maturity.