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tCity of Saint Anthony <br /> Investment Portfolio Review Report <br /> •Commercial paper. Commercial paper is subject to credit risk because this type of <br /> security is backed by a corporation's promise to repay the purchase price plus <br /> ' interest. M.S. 118A.04 allows local governments to invest in commercial paper <br /> issued by U.S. corporations that is rated the highest quality by at least two <br /> nationally recognized rating agencies. <br /> Recommendation#2: For the week ending December 29`h, the Federal Reserve <br /> G-13 Statistical Release shows that 1-month commercial paper yield was 6.45%. <br /> Consider analyzing the commercial paper yield curve and increasing the amount <br /> ' invested in commercial paper in order to yield a higher rate of return. Federal <br /> bankruptcy laws give preference to investing in commercial paper that matures in <br /> 90 days or less. <br /> ' •Certificates of deposit. A CD may be subject to credit risk. The FDIC insures <br /> deposits up to$100,000 per account per institution. This level includes principal <br /> and any unpaid interest due. Ratio analyses compare assets to total liabilities. A <br /> rating is usually generated which would give the City an overall impression of the <br /> financial condition of the institution. Obtaining an asset ratio analysis from the <br /> broker before a CD is purchased can minimize risk of loss. <br /> Local governments should minimize the risk of loss of principal or interest by <br /> avoiding `doubling up' on any CD's in any one institution. St Anthony currently <br /> does not have more than the FDIC amount in any one financial institution. Another <br /> strategy to minimize the risk of loss is to purchase CDs at an amount where <br /> principal and unpaid interest is less than $100,000. This minimizes the risk that the <br /> City will lose an interest payment should be financial institution fail. <br /> Recommendation#3: Request financial information and ratio analysis from the <br /> 1 broker before purchasing a CD. Consider amending the investment policy to limit <br /> cd purchases in increments of less than $100,000. <br /> • Zero coupon bonds and stripped coupon bonds. This is a long-term investment that <br /> is priced at its present value when it is sold,usually at a deep discount. It matures at <br /> its face value and pays interest at that time. This type of investment is subject to <br /> ' market risk because the market value of the investment can fluctuate significantly <br /> without an interest payment to cushion the investor. St Anthony owns a par value <br /> of$3,117,000 in zero coupon bonds that were purchased for$748,170. The City <br /> has not suffered severe market value erosion on these investments because the yield <br /> to maturity is approximately 8%, which is higher than 5.46% yield on the 30-year <br /> treasury. <br /> ' Recommendation #4: Before purchasing any new zero coupon bonds, consider <br /> whether such long-term investment vehicles fit into the near term and long term <br /> cash flow needs of the city. Should this investment vehicle not fit into the city's <br /> ' cash flow needs, the city should consider the role of this investment given the <br /> current market conditions. <br /> • Asset backed bonds. These are also long term investments that periodically repay a <br /> portion of principal and interest through time. These instruments are subject to <br /> market and interest rate risk. The value of the investment is derived from the value <br /> Prepared by Ehlers and Associates 3 <br /> February 5, 2001 <br />