fundamentalsof public funds investing

FUNDAMENTALS OF PUBLIC FUNDS INVESTING

S E S S I O N 1 | INTRODUCTION T O P U B L I C F U N D S I N V E S T I N G

Ri ck Ph i l l i p s President and Chief Investment Officer | FHN Financial Main Street

January 12, 2021

C D I AC – C M TA “ Q u i z S h o w ” !

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SECTION ONE

1 Point

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The first analysis to be completed before you invest your entity’s funds

Cash Flow Analysis!

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A security that has a statedmaturity and cannot be called early

Bullet

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Short term obligations issued by banks, corporations, and other issuers that typically

mature between 1 and 270 days

Commercial Paper

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The difference between the yields of two different securities, also, the

difference between the bid and the asked prices of a security

Spread

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The two species of birds used to describe Federal Reserve members who

favor easy or tight monetary policy

Hawk or Dove

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Securities industry procedure where securities that are sold are paid for

using the purchasing entities’ custodian or clearing agent

Delivery vs. Payment(DVP)

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Markets where securities arebought and sold after

original issuance

Secondary Market

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The Federal Reserve Bank of New York trades U.S. government and select other

securities with these designated firms

Primary Dealers

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Accounting practice that graduallylowers the cost basis of a bond over

the remain life of the security

Amortization

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The gradual increase in the value of a bond between the price of a bond

bought at a discount and the par value

Accretion

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A line plotting the interest rates onbonds of equal credit quality but

different maturity dates

Yield Curve

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The risk that changes in interest rateswill adversely affect the value of

a portfolio

Interest Rate Risk

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The risk that a financial obligation willnot be paid and a loss will result

Credit Risk

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A bond that is redeemable by theissuer prior to the scheduled

maturity date

Callable Bond

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SECTION TWO

2 Points

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A contract that gives the buyer theright, but not the obligation, to buyor sell an asset at a specified price

Option Contract

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Bonus Points

1 Point Each for Naming the Different Types of Calls(Both the Nickname and Description)

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American: ContinuousEuropean: One-Time

Bermudan: Qrtly/Mo/AnnCanary: Callable then Bullet

Verde: European-Canary Blend

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A bond that pays an initial coupon rate for the first period, and then a higher coupon

rate(s) for the following periods

Step-Up

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Yield on a bond when thecall option is exercised

Yield to Call

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An order to buy or sell a security specifying that only the entire amount will be sold/purchased

All or None

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The branch of the Federal Reserve Board that determines the direction of monetary policy. The group is composed of the board

of governors, which has 7 members, and 5 reserve bank presidents. The president of the Federal Reserve Bank of New York serves continuously, while the presidents of the other reserve banks

rotate their service of one-year terms.

Federal Open Market Committee (FOMC)

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Formal evaluation (ranking) of a company’s credit history and ability to

repay obligations

Credit Ratings

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Risk that a debt holder will notreceive interest and/or principal

when due

Default Risk

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Unconventional monetary policy used by central banks to stimulate the

economy when standard monetary policy has become ineffective

Quantitative Easing

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An exchange of one security foranother to change the maturity,

credit quality or return ona portfolio

Swap

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Security with a variable interestrate that is tied to another

interest rate

Floating Rate Bond

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If a floating rate security has amaximum rate that it will pay it is

said to have a:

Cap

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If a floating rate security has aminimum rate that it will pay it is

said to have a:

Floor

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The rate of return on a bond; taking into account the annual interest payment, purchase price, redemption value, and remaining time to

maturity

Yield to Maturity

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An agreement between a buyer andseller, where the seller agrees to buyback the security at an agreed upon

price and date(hint: 102% collateral is usually involved)

Repurchase Agreement (Repo)

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The relative ease with which a particular security may be bought or sold in volume without significantly effecting the price

Liquidity

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Bonus 100 Points: Rank Most to Least Liquid

Agency CallableTreasury Note

Agency Step-UpAgency Bullet

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1

4

2

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The current value of a future payment, or stream of payments, discounted at the

appropriate compound interest rate

Present Value

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The most recently issued Treasuryor benchmark security to a

particular maturity

On-the-Run

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The risk that a bond will be redeemedby the issuer before the scheduled

maturity date

Call Risk

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Strategy whereby the portfolio manager acquires and holds securities until maturity

before reinvesting

Buy and Hold

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Strategy whereby the portfolio manager continually buys and sells securities

Active Management

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Structuring one's portfolio to match abroad-based index

Indexing

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This return value takes into accountthe realized gains/losses andthe income received on the

portfolio of investments

Book Return

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This return value takes into accountthe realized gains/losses, unrealized gains/losses

and the income received on theportfolio of investments

Total Return

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Study/analysis of the financial condition andtrends of a company or individual to assess

wherewithal to repay obligations

Credit Analysis

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Interest rate used to determine the Present Value of future cash flows / Also the interest rate that the Federal Reserve charges member banks

for short-term loans

Discount Rate

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SECTION THREE

3 Points

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A portfolio’s weighted time to maturity in proportion to all the securities’ dollar values in

the portfolio

Weighted Average Maturity(WAM)

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A derivative transaction in which two parties enter into an agreement, whereby one party pays the other a fixed periodic coupon for the specified life of the agreement. The other party

makes no payments unless a credit event, relating to a predetermined reference asset, occurs. It is sometimes

referred to as “bond insurance”.

Credit Default Swap

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In mutual funds/pools: the market valueof a fund/pool share

Net Asset Value

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Adjustment of the value of asecurity or portfolio to reflect

current market values; generally reported yearly in an public fund entity's CAFR

Mark to Market(GASB 31)

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Person, company, associationholding and investing assets wisely

in trust for a beneficiary

Fiduciary

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A method used to approximate thevalues on the yield curve for

maturities that have no on-the-run security

Interpolation

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Companies that provide anassessment of the credit worthiness

of an issuer (long name)

Nationally Recognized Statistical Rating Organizations (NRSROs)

(aka Rating Agencies)

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Bonds or notes backed by loans(auto, equipment) or receivables

(credit cards)

Asset-Backed Security

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A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. This formula is used to determine the effect that a 100-basis-point (1%) change in interest

rates will have on the price of a bond.

Duration(Modified)

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The observed price sensitivity of a bond, to a given change in yield, calculated by revaluing the bond at higher and lower rates; usually

used on bonds with embedded options

Effective Duration

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Mathematical concept that measuresthe sensitivity of the market price of an interest-

bearing security to changes in interest rate levels…Describes the rate of change on the

Price/Yield function

Convexity

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Callable bonds generally have positive or negative convexity

Negative Convexity

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The flat spread applied to theTreasury yield curve that is

produced by a pricing model usedto value the embedded options in the security

Option Adjusted Spread(OAS)

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Rate of return, on a bond withembedded options, that gives the

lowest anticipated yield

Yield to Worst

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The term used when an index, indicator, or bond is adjusted for inflation

Real

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The expected future rate/yield of a bond based upon breakeven indifference

rates/yields

Implied Forward Rate

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Different methods (conventions) of how interest accrues over time for a variety of

investments

Day Count Conventions

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Day Count Conventions 1 Point Each:

Treasury Notes:

Agency Notes:

T-Bills & Discos:

Actual/Actual

30/360

Act/360

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A treasury security that is indexed to inflation in order to protect investors from the negative effects of inflation

Treasury Inflation Protected Security (TIPS)

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For 5 points:What does “CUSIP” stand for:

Committee on Uniform Securities Identification Procedures

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For 10 points:What is the relationship between

CUSIPs and the Alphabet:

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FHN Main Street DisclosureAlthough this information has been obtained from sources which we believe to be reliable, we do not guarantee its accuracy, and it may be incomplete or condensed. This is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. All herein listed securities are subject to availability and change in price. Past performance is not indicative of future results, and changes in any assumptions may have a material effect on projected results. Ratings on all securities are subject to change.

FHN Financial Capital Markets, FHN Financial Portfolio Advisors, and FHN Financial Municipal Advisors are divisions of First Horizon Bank. FHN Financial Securities Corp., FHN Financial Main Street Advisors, LLC, and FHN Financial Capital Assets Corp. are wholly owned subsidiaries of First Horizon Bank. FHN Financial Securities Corp. is a member of FINRA and SIPC — http://www.sipc.org/.SIPC. FHN Financial Municipal Advisors is a registered municipal advisor. FHN Financial Portfolio Advisors is a portfolio manager operating under the trust powers of First Horizon Bank. FHN Financial Main Street Advisors, LLC is a registered investment advisor. None of the other FHN entities, including FHN Financial Capital Markets, FHN Financial Securities Corp., or FHN Financial Capital Assets Corp. are acting as your advisor, and none owe a fiduciary duty under the securities laws to you, any municipal entity, or any obligated person with respect to, among other things, the information and material contained in this communication. Instead, these FHN entities are acting for their own interests. You should discuss any information or material contained in this communication with any and all internal or external advisors and experts that you deem appropriate before acting on this information or material.

FHN Financial, through First Horizon Bank or its affiliates, offers investment products and services. Investment products are not FDIC insured, have no bank guarantee, and may lose value.

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CDIAC Disclosure

The Investment Primer is designed to provide accurate and authoritative information in regard to the subject matter covered; it has been provided with the understanding that, through the Investment Primer, neither the authors nor CDIAC are engaged in rendering investment, accounting, legal, or other professional services. This Investment Primer should not be construed as providing legal advice or opinions on any specific facts. Readers should consult appropriate professional advisors if such services are sought. Readers should note that each public agency is unique, and while the Investment Primer can be of use to various types of public agencies not everything contained in the Investment Primer is applicable to every public agency (e.g., not all investments described in the Investment Primer should be part of every local agency’s portfolio).

We look forward to your participation in the next webinar in this series, California Government Code, Legal Investments, and Investment Policy.

THANK YOU