Investment Fundamentals for Government Finance Officers Mike Fink Sr. Vice President – Wealth Management Investment Management Specialist The OHIO VALLEY GROUP At Morgan Stanley Smith Barney

Disclaimer Morgan Stanley Smith Barney LLC. Member SIPC. Morgan Stanley Smith Barney LLC and its affiliates do not provide tax or legal advice. To the extent that this material or any attachment concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Any such taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor. Bonds are affected by a number of risks, including fluctuations in interest rates, credit risk and prepayment risk. In general, as prevailing interest rates rise, fixed income securities prices will fall. Bonds face credit risk if a decline in an issuer's credit rating, or creditworthiness, causes a bond's price to decline. High yield bonds are subject to additional risks such as increased risk of default and greater volatility because of the lower credit quality of the issues. Finally, bonds can be subject to prepayment risk. When interest rates fall, an issuer may choose to borrow money at a lower interest rate, while paying off its previously issued bonds. As a consequence, underlying bonds will lose the interest payments from the investment and will be forced to reinvest in a market where prevailing interest rates are lower than when the initial investment was made. The views expressed herein are those of the author and do not necessarily reflect the views of Smith Barney or its affiliates. All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Past performance is no guarantee of future results.

The OHIO VALLEY GROUP at Morgan Stanley Smith Barney Overview Challenges and Opportunities Challenges and Opportunities Terminology and Risks Terminology and Risks Strategy and Execution Strategy and Execution

The OHIO VALLEY GROUP at Morgan Stanley Smith Barney The Challenges Lack of time Lack of time Lack of investment background Lack of investment background Responsibility but no authority Responsibility but no authority Explaining your investment decisions to administrative board Explaining your investment decisions to administrative board No written policy No written policy Someone else handles it Someone else handles it

The OHIO VALLEY GROUP at Morgan Stanley Smith Barney Importance of Effective Treasury Management Affects people’s lives, jobs Affects people’s lives, jobs Enables local government to provide more/ better equipment, computers, police cars, etc. Enables local government to provide more/ better equipment, computers, police cars, etc. Efficient use of taxpayer money Efficient use of taxpayer money 10 basis points = $1,000/ $1,000, basis points = $1,000/ $1,000,000

The OHIO VALLEY GROUP at Morgan Stanley Smith Barney Balancing Act Safety – (ORC) Safety – (ORC) Liquidity - basic approach: Liquidity - basic approach: lowest fund balance lowest fund balance – highest expenses – highest expenses investable funds investable funds Yield – return of and on investment Yield – return of and on investment

The OHIO VALLEY GROUP at Morgan Stanley Smith Barney Best Practices Stay within the parameters of your investment policy Stay within the parameters of your investment policy Communicate effectively Communicate effectively Diversify your portfolio (investment maturities) Diversify your portfolio (investment maturities) Seek trusted, expert sources Seek trusted, expert sources Don’t chase yield Don’t chase yield

The OHIO VALLEY GROUP at Morgan Stanley Smith Barney Investment Opportunities Certificates of Deposit Certificates of Deposit Bonds: Bonds: US Treasury SecuritiesUS Treasury Securities US Agency SecuritiesUS Agency Securities State and Local Government BondsState and Local Government Bonds Money Market Investments: Money Market Investments: Repurchase AgreementsRepurchase Agreements Bankers AcceptancesBankers Acceptances Commercial PaperCommercial Paper Money Market Mutual FundsMoney Market Mutual Funds

The OHIO VALLEY GROUP at Morgan Stanley Smith Barney Bond Terminology Basis Point Basis Point Bid and Ask price Bid and Ask price Coupon Yield Coupon Yield Current Yield Current Yield Yield to Maturity Yield to Maturity Call Provision Call Provision Par Value Par Value Maturity Maturity Premium/ Discount Premium/ Discount

The OHIO VALLEY GROUP at Morgan Stanley Smith Barney Understanding Risks Interest Rate Risk Interest Rate Risk Reinvestment Risk Reinvestment Risk Event Risk Event Risk Call/ Prepayment Risk Call/ Prepayment Risk Liquidity Risk Liquidity Risk Credit/ Default Risk Credit/ Default Risk Inflation Risk Inflation Risk

The OHIO VALLEY GROUP at Morgan Stanley Smith Barney Basic Strategies Ladder Ladder Barbell Barbell Bullet - Matching Bullet - Matching Duration Management Duration Management

The OHIO VALLEY GROUP at Morgan Stanley Smith Barney Duration Duration is a measure of the price sensitivity of a bond (portfolio) to a change in yields. Duration is a measure of the price sensitivity of a bond (portfolio) to a change in yields. Formula: Formula: Duration=(1+y)/-[(1+y)+n(c-y)]/ Duration=(1+y)/-[(1+y)+n(c-y)]/ {c[(1+y) ⁿ -1]+y} {c[(1+y) ⁿ -1]+y}

The OHIO VALLEY GROUP at Morgan Stanley Smith Barney Execution Stay Informed Stay Informed Establish a Framework Establish a Framework Diversify Diversify Interpret the Yield Curve Interpret the Yield Curve

Investment Fundamentals for Government Finance Officers Mike Fink Sr. Vice President – Wealth Management Investment Management Specialist The OHIO VALLEY GROUP At Morgan Stanley Smith Barney