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CITY OF HUGO, MINNESOTA <br />NOTES TO FINANCIAL STATEMENTS (CONTINUED) <br />3. Detailed Notes on All Funds <br />A. Deposits and Investments (continued) <br />Investment Policy <br />The City does not maintain a formal investment policy that limits investment maturities as a <br />means of managing its exposure to fair value losses arising from increasing interest rates or that <br />would limit its investment choices as a means of managing its exposure to credit risk. <br />The City is authorized by Minnesota Statutes to invest idle funds as follows: <br />(a) Direct obligations or obligations guaranteed by the United States or its agencies. <br />(b) Shares of investment companies registered under the Federal Investment Company Act of <br />1940 and whose only investments are in securities described in (a) above. <br />(c) General obligations of the State of Minnesota or its municipalities. <br />(d) Bankers acceptances of United States banks eligible for purchase by the Federal Reserve <br />System. <br />(e) Commercial paper issued by United States corporations or their Canadian subsidiaries, of <br />the highest quality, and maturing in 270 days or less. <br />(f) Repurchase agreements with banks that are members of the Federal Reserve System with <br />capitalization exceeding $10,000,000, a reporting dealer to the Federal Reserve Bank of <br />New York, or certain Minnesota securities broker-dealers. <br />(g) Money market funds with institutions that have portfolios consisting exclusively of United <br />States Treasury obligations and Federal Agency issues. <br />(h) Guaranteed investment contracts (gic's) issued or guaranteed by United States commercial <br />banks or domestic branches of foreign banks or United States insurance companies and <br />with a credit quality in one of the top two highest categories. <br />Interest Rate Risk <br />Interest rate risk is the risk that changes in market interest rates will adversely affect the fair <br />value of an investment. Generally, the longer the maturity of an investment, the greater the <br />sensitivity of its fair value to changes in market interest rates. The City does not have a formal <br />policy related to interest rate risk for its investments, but one of the ways that the City manages <br />its exposure to interest rate risk is by purchasing a combination of shorter and longer term <br />investments and by timing cash flows from maturities so that a portion of the portfolio is <br />maturing or coming close to maturity evenly over time as necessary to provide the cash flow <br />and liquidity needs for operation. <br />42 <br />