Presented by: The Northern Trust Company Elizabeth V. Hasten,CTP

1. Windy City Summit CTP Review Chapter 11 Service Expertise Integrity Presented by: The Northern Trust Company Elizabeth V. Hasten,CTP

2. Chapter 11 Money Markets, Short-Term Investing and Borrowing

3. Global Money Markets • Money Market Participants • Government entities • Securities dealers • Commercial banks • Corporations • Individuals • Broker-dealer

4. Global Money Markets • Types of Money Market Instruments and Investments • Commercial Paper (CP)- tradable promissory notes issued by companies at a discounted price (liquid but not secured) • Asset-backed commercial paper- CP that is secured against a specific asset • Bank Obligations- time deposits such as CDs • Government Paper (T-bills)- tradable promissory notes issued by governments • Floating rate notes- promises to return face value plus interest • Repurchase agreements (repos)- bank or dealer sells securities agreeing to buy them back later at a higher price • Money Market Funds- comingled pools of money market instruments • Short-Duration Mutual Funds- invest in securities with longer maturities than most money market instruments • Sweep Accounts-loan sweeps

5. Short-Term Money Markets in the U.S. • Processing and Clearing of Short-Term Investments • Commercial Book Entry System(CBES)- Delivery system for the simultaneous transfer of securities against the settlement of funds • Depository Trust and Clearing Corporation (DTCC)- Provides clearing, settlement and information services for bonds, money market instruments, securities and derivatives • U.S. Money Market Participants • U.S. Treasury and federal agencies • Commercial banks • Thrifts • Municipalities • Corporations • Federal Reserve • Securities dealers

6. Short-term Money Markets in the U. S. • U. S. Money Market Instruments • U.S. Treasury Bills: usually exempt from state income tax, mature in less than one year and are sold through a sealed bid auction • Bank Debt Obligations: FDIC insured • Commercial Paper: has maturity of less than 270 days, evaluated by rating agencies and is issued by large corporations, and non-bank finance companies • U.S. Federal Agency and Government-Sponsored Enterprise (GSE) Securities: carries explicit or implied guarantee by the U.S. government (Ginnie Mae) • Municipal Notes, Variable Rate Demand Obligations and Tax-Exempt Commercial Paper: mature in 3 months- one year • Money Market Funds: prime, government, treasury and tax-exempt classes, sold in shares by banks, fund providers and investment brokers

7. Managing Short-term Investments • Short-Term Investment Policy • Focuses on liquidity maintenance and principal preservation, based on risk tolerance • In-House Management vs. Outsourced Management • In-house expensive for small companies and small investment portfolios • Policies and guidelines must be communicated clearly to outside manager when outsourced • Investment Strategies • Buy-and-hold-to-maturity • Actively managed • Tax-based • Reliable Reporting

8. Managing Short-term Investments • Securities Safekeeping and Custody Services • Focuses on liquidity maintenance and principal preservation, based on risk tolerance • Investment Risk Considerations and Factors Influencing Investment Pricing • Credit or Default Risk (higher yields, higher risk) • Asset Liquidity Risk • Price/Interest Rate Risk • Foreign Exchange (FX) Risk

9. Pricing and Yields on Short-Term Investments • Factors Influencing Investment Pricing • Yield : measure of return on investment • Yield curves • Tax status • Taxable Equivalent Yield = Tax Exempt Yield • (1-Investor’s Marginal Tax Rate) • Yield Calculations for Short-Term Investments • Yield calculation principles and examples • Holding Period Yield= Cash Received at Maturity – Amount Invested • Amount Invested • Annual Yield=HoldingPeriod Yield x Days in Year • Days to Maturity

10. Managing Short-Term Financing • Short-Term Funding Alternatives • Trade credit syndications and participations • Internal borrowing • Selling of receivables • Commercial bank credit • Loan syndication and participations • Line of credit • Revolving credit agreement • Single payment notes • Repurchase agreement • Commercial paper Issuance • Asset-based borrowing

11. Managing Short-Term Financing • Dollar Discount =Par Value – Purchase Price • =Cash received at maturity – amount invested • =Discount Rate x Par Value x Days to Maturity • 360 • Discount Rate= Dollar Discount x 360 • Par value Days to maturity • Money Market Yield= Holding period yield x 360 • (based on 360 day year) Days to maturity • Bond Equivalent Yield = Holding period yield x 365 • (based on 365 day year) Days to maturity

12. Managing Short-Term Financing • Bond Equivalent Yield = Holding period yield x 365 • (based on 365 day year) Days to maturity • = Money market yield x 365 • 360 • Bond equivalent yield will always exceed the money market yield • Money market yield will always exceed the discount rate • Purchase Price = Par Value – Dollar Discount

13. Managing Short-Term Financing • Annual Cost of Commercial Paper Issuance = • Dollar Discount = Discount Rate x Par Value x Days to Maturity • 360 • Usable Funds = Par value – Dollar Discount • Prorated Dealer Fee = Annual Fee Rate x CP Issue Size x Days to Maturity • 360 • Prorated Backup Line = Annual Line Rate x CP Issue Size x Days to Maturity • of credit Fee 360 • Annual Interest Rate=Dollar Discount + Dealer Fee + Backup Line Fee x 365 • Usable Funds 360 • Commercial Paper Nominal Yield = Dollar Discount x 365 • Purchase Price Days to Maturity

14. Managing Short-Term Financing • Annual Cost of Line of Credit= • Interest Paid = Average Borrowing x All-in-Rate • Fee on Unused Portion = Unused Portion x Commitment Fee • Annual Interest Rate = Interest Paid+ Fee on Unused Portion • Unused Portion of Line (-Compensating Balance) • Avail. Amt = Borrowed Amt –(Compensating Balance %) x (Borrowed Amt) • Borrowed Amount = Available Amount • 1-(Compensating Balance %) Managing Short-Termnancing