Fixed Income Security Types Marco Island May 5, 2014

1. Florida Tax Collectors Association 2014 Spring Education Forum Fixed Income Security TypesMarco IslandMay 5, 2014 Presented by: Michael R. Varano, Managing Director and Senior Portfolio Manager varanom@pfm.com PFM Asset Management LLC 300 South Orange Avenue, Suite 1170 Orlando, FL 32801

2. Types of Fixed Income Securities Money Market Bonds • U.S. Treasury Bills • Federal Agency Discount Notes • Commercial Paper • Bankers’ Acceptances • Repurchase Agreements • Certificates of Deposit • Money Market Mutual Funds • U.S. Treasury Notes/Bonds • Federal Agency Notes/Bonds • Mortgage Backed Securities • Corporate Notes • Mutual Funds • (aka Bond Funds) Mature in < 1 Year Mature in > 1 Year

3. Credit Ratings S&PMoody’sExplanation of Rating AAA AaaHigh quality. Smallest degree of investment risk AA AaHigh quality. Differs only slightly from highest-rated issues. A AAdequate capacity to pay interest and repay principal. BBB BaaMore susceptible to adverse effects of changes in economic conditions. BB BaHas speculative elements; future not considered to be well-assured. B BGenerally lack characteristics of desirable investment. CCC CaaPoor standing. Vulnerability to default. C CExtremely poor prospects. D DIn default

4. Security Types U.S. Government Municipals Corporates • U.S. Treasuries • SLGS • Federal Agencies • Mortgage Backed Securities • General Obligation Bonds • Revenue Bonds • Commercial Paper • Bankers’ Acceptances • Corporate Notes • Certificates of Deposit Repurchase Agreements Mutual Funds

5. U.S. Treasury Obligations Treasuries Issuer: U.S. Government Credit Quality: “Risk Free” Liquidity: High (active market) Custody: Federal Reserve (Book entry)

6. Federal Agency/GSE Obligations Issuer: Federal agencies Government sponsored enterprises (GSE) Credit Quality: Most are AA+ (S&P) / Aaa (Moody’s) Most do not carry explicit U.S. Government guarantee (full faith and credit) Term of Maturity: 1 day to 30 years Liquidity: Generally high, but depends on structure Custody: Federal Reserve (Book entry) Return: Higher than U.S. Treasury obligations Caution: May have complicated structures May be callable Agencies

7. Most Common GSE Issuers • Fannie Mae (previously, Federal National Mortgage Association) • Federal Home Loan Banks (FHLB) • Freddie Mac (previously, Federal Home Loan Mortgage Corporation) • Federal Farm Credit Banks (FFCB) • Government National Mortgage Association (GNMA or “Ginnie Mae”)

8. Repurchase Agreements Investor Counterparty Cash Transaction Begins Delivery vs. Payment Securities Returned to broker/dealer who “re-purchases” them Securities Transaction Ends Cash + Interest • An agreement in which an investor buys securities from a counterparty who agrees to buy the securities back at a later date at an agreed upon price and rate • Yield determines the “repurchase price” Repos

9. Repurchase Agreements

10. Commercial Paper CP

11. Asset Backed Commercial Paper • CP issued by a special purpose corporation to finance receivables or purchase assets • Allows institutions to shift liabilities off of their balance sheets

12. Bankers’ Acceptances BAs Time drafts used in international trade.

13. Certificates of Deposit CDs *Passage of Dodd-Frank Wall Street Reform and Consumer Protection Act permanently raises the current standard maximum deposit insurance amount (SMDIA) to $250,000.

14. Corporate Notes

15. How Maturity Impacts Long-Term Returns • Longer maturities typically generate higher returns over time. • But, longer maturities experience greater volatility. Source: BofA Merrill Lynch Indices; Cumulative values based on $100 million growing at the rate of return of the index; Investors cannot invest directly in indexes.

16. Money Market Funds and Pools

17. Money market funds are a type of mutual fund developed in the 1970s as an option for investors to purchase a pool of fixed income securities that generally provided higher returns than interest-bearing bank accounts. They have since grown significantly and currently hold more than $2.9 trillion in assets, the majority of which is in institutional funds. Under Investment Company Act Rule 2a-7, these funds must limit their portfolio investments to high-quality, short-term debt securities and are mandated to have a weighted average maturity of <60 days. Unlike other mutual funds, money market funds seek to maintain a stable share price (typically $1.00) through the use of certain valuation and pricing methods permitted under Rule 2a-7. The typical experience for a money market fund investor is that when they invest a dollar, they are able to get back a dollar on demand (plus the yield that was earned during the course of the investment). As a result, money market funds have become popular cash management vehicles for retail and institutional investors. The History of Money Market Funds

18. Other “Money Markets” Examples of Money Market Securities • U.S. Treasury Bill & Notes • Federal Agency Discount Notes • Federal Agency Floating Rate Securities • Index – Fed Funds, T-Bills, or LIBOR • Commercial Paper • Certificates of Deposit • Negotiable • Non-Negotiable • Bankers Acceptances • Repurchase Agreements • Municipal Bonds • Money Market Funds

19. LGIPs vs. RICs • Local Government Investment Pools (LGIPs) • Money Market Funds setup by public entities with a common purpose (i.e. States, Local Governments, School Board Associations). • These funds are typically managed by in state departments or large Asset Management Firms • Registered Investment Companies (RICs) • Money Market Funds that are registered with the SEC. • Subject to further regulation • Can be marketed to a larger client base (not state specific). • Rule 2a-7 of the Investment Company Act of 1940

20. Market Forces Affecting Funds

21. Money Market Funds What drives rates for money market securities? • FOMC - “The Fed” • LIBOR • Other supply/demand factors • (i.e. Flight to quality causes Treasury Bill yields to fall)

22. FOMC - “The Fed” Federal Open Market Committee • Led by chair Janet Yellen • FOMC meets about every 6 weeks to determine monetary policy. • Sets Fed Funds Rate- rate at which commercial banks lend to each other on an overnight basis. • Achieves target through Open Market Operations (the buying and selling of Treasury securities in market- basically controlling supply and demand).

23. Historic Federal Funds Target Rate

24. LIBOR What is LIBOR? • “London Interbank Offer Rate” • Daily reference rate at which banks in this international system could borrow from each other on an unsecured basis. • Rates published daily in London by the British Bankers Association (through a survey of worlds largest banks) • The most widely used benchmark rate for short-term fixed income markets and a benchmark for commercial paper and CD’s

25. LIBOR

26. Disclaimer This material is based on information obtained from sources generally believed to be reliable and available to the public, however PFM Asset Management LLC cannot guarantee its accuracy, completeness or suitability. This material is for general information purposes only and is not intended to provide specific advice or a specific recommendation.  All statements as to what will or may happen under certain circumstances are based on assumptions, some but not all of which are noted in the presentation. Assumptions may or may not be proven correct as actual events occur, and results may depend on events outside of your or our control.  Changes in assumptions may have a material effect on results. Past performance does not necessarily reflect and is not a guaranty of future results. The information contained in this presentation is not an offer to purchase or sell any securities.