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Investing Bond Proceeds Presented by: Miriam Cleary, Regional Director May 25, 2010

Investment Objectives. What is permitted?What is the investment horizon?What is the minimum credit quality?Are there liquidity considerations?Is yield restricted?. 2. Federal Arbitrage Compliance Issues. Federal arbitrage rebate requirementsFederal arbitrage yield restrictionsMajor exceptions:Small Issuers Tax and revenue anticipation notes (TRANS) Debt service funds Spending exceptionsTax-exempt investments.

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Investing Bond Proceeds Presented by: Miriam Cleary, Regional Director May 25, 2010

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    1. Investing Bond Proceeds Presented by: Miriam Cleary, Regional Director May 25, 2010

    2. Investment Objectives What is permitted? What is the investment horizon? What is the minimum credit quality? Are there liquidity considerations? Is yield restricted? 2

    3. Federal Arbitrage Compliance Issues Federal arbitrage rebate requirements Federal arbitrage yield restrictions Major exceptions: Small Issuers Tax and revenue anticipation notes (TRANS) Debt service funds Spending exceptions Tax-exempt investments 3

    4. Managing Risk Credit risk Risk that issuer will be unable to redeem investment at maturity Market risk Risk that changes in financial markets will reduce value of security Liquidity risk Risk that investment cannot be sold before maturity without incurring significant loss in price Reinvestment risk Risk that reinvestment will have lower yield than current market rate 4

    5. Investment Options State and local government series (SLGS) Liquidity pools Investment agreements Structured portfolios 5

    6. State and Local Government Series (SLGS) Time deposit securities Various maturities Yield calculation Liquidity considerations Demand deposit securities One-day certificate Yield calculation Next day liquidity SLGSafe—online service 6

    7. Liquidity Pools Types Local government investment pools Money market mutual funds Advantages Same-day liquidity in most cases Stable net asset value (NAV) AAA-rating Arbitrage rebate tracking in some cases Disadvantages Fluctuating yield Legality 7

    8. Investment Agreements Types Flexible repurchase agreements (flex repo) Guaranteed investment contracts (GICs) Bank investment contracts (BICs) Advantages Guaranteed rate Access to funds with 1-2 day notice Disadvantages Credit risk Administrative issues 8

    9. Structured Portfolios Used in combination with liquidity pools, repurchase agreements and direct securities Portfolio structured to meet expected draw schedule Portfolio restructured as draw schedule or markets change 9

    10. Structured Portfolios Advantages Avoids “playing the market” Locks in yield Allows for restructuring Disadvantages Requires investment expertise Must account for securities 10

    11. Sample Portfolio Drawdown Schedule 11

    12. Sample Investment Portfolio 12

    13. Sample Portfolio and Earnings Summary 13

    14. Summary Consider the risks and rewards of all investment options. Develop an investment strategy for all proceeds. Revisit each fund’s strategy on a frequent basis. Outside investment managers can help. Keep all of the interest earnings you can. 14

    15. Arbitrage Compliance Arbitrage is the difference earned from investing tax-exempt bond proceeds in higher yielding taxable securities • Unless an issuer meets one of the exceptions, arbitrage is subject to rebate and 100% taxable • Issuer will have to pay penalties for failure to rebate arbitrage earnings on a timely basis 15

    16. Why Arbitrage Rebate is Important The tax-exempt issuer is ultimately responsible for arbitrage compliance Initial evaluation of arbitrage rebate requirements for each bond issue to design optimal investment strategies Possible exceptions to arbitrage rebate Arbitrage yield Yield restriction requirements on investments Periodically compute arbitrage rebate liabilities Annual financial statements will be accurate Rebate amounts will be set aside as liabilities are incurred Investments can be optimized in line with rebate status 16

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