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06-20-07 FPAC Minutes
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06-20-07 FPAC Minutes
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06-20-07 Minutes
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6/20/2007
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undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. The <br /> objective will be to mitigate credit risk and interest rate risk. <br /> a. Credit Risk <br /> The [entity]will minimize credit risk,which is the risk of loss due to the failure of the security <br /> issuer or backer,by: <br /> • Limiting investments to the types of securities listed in Section VII of this Investment Policy <br /> • Pre-qualifying the financial institutions,broker/dealers, intermediaries,and advisers with which <br /> the [entity]will do business in accordance with Section V <br /> • Diversifying the investment portfolio so that the impact of potential losses from any one type of <br /> security or from any one individual issuer will be minimized. <br /> b. Interest Rate Risk <br /> The [entity] will minimize interest rate risk,which is the risk that the market value of securities in <br /> the portfolio will fall due to changes in market interest rates,by: <br /> • Structuring the investment portfolio so that securities mature to meet cash requirements for <br /> ongoing operations, thereby avoiding the need to sell securities on the open market prior to <br /> maturity <br /> • Investing operating funds primarily in shorter-term securities,money market mutual funds, or <br /> similar investment pools and limiting the average maturity of the portfolio in accordance with this <br /> policy(see section VIII). <br /> 2. Liquidity <br /> The investment portfolio shall remain sufficiently liquid to meet all operating requirements that may <br /> be reasonably anticipated. This is accomplished by structuring the portfolio so that securities mature <br /> concurrent with cash needs to meet anticipated demands(static liquidity). Furthermore, since all <br /> possible cash demands cannot be anticipated,the portfolio should consist largely of securities with <br /> active secondary or resale markets(dynamic liquidity). Alternatively, a portion of the portfolio may <br /> be placed in money market mutual funds or local government investment pools which offer same-day <br /> liquidity for short-term funds. <br /> 3. Yield <br /> The investment portfolio shall be designed with the objective of attaining a market rate of return <br /> throughout budgetary and economic cycles,taking into account the investment risk constraints and <br /> liquidity needs. Return on investment is of secondary importance compared to the safety and liquidity <br /> objectives described above. The core of investments are limited to relatively low risk securities in <br /> anticipation of earning a fair return relative to the risk being assumed. Securities shall generally be <br /> held until maturity with the following exceptions: <br /> • A security with declining credit may be sold early to minimize loss of principal. <br /> • A security swap would improve the quality,yield,or target duration in the portfolio. <br /> • Liquidity needs of the portfolio require that the security be sold. <br /> Alternative sample language: <br /> The[entity's] cash management portfolio shall be designed with the objective of regularly meeting or <br /> exceeding a performance benchmark,which could be the average return on three-month U.S. <br /> Treasury bills,the state investment pool, a money market mutual fund(specify)or the average rate on <br /> Fed funds, whichever is higher. These indices are considered benchmarks for lower risk investment <br /> transactions and therefore comprise a minimum standard for the portfolio's rate of return. The <br /> • <br /> investment program shall seek to augment returns above this threshold, consistent with risk limitations <br />
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