1. 0 © 2013 PFM Asset Management LLC Fixed Income Security Types Marco Island May 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 2014 Spring Education Forum Florida Tax Collectors Association

2. 1 © 2013 PFM Asset Management LLC Types of Fixed Income Securities U.S. Treasury Bills Federal Agency Discount Notes Commercial Paper Bankers’ Acceptances Repurchase Agreements Certificates of Deposit Money Market Mutual Funds Money Market Bonds 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. 2 © 2013 PFM Asset Management LLC Credit Ratings S&PMoody’s Explanation of Rating AAAAaa High quality. Smallest degree of investment risk AAAa High quality. Differs only slightly from highest-rated issues. AA Adequate capacity to pay interest and repay principal. BBBBaa More susceptible to adverse effects of changes in economic conditions. BBBa Has speculative elements; future not considered to be well-assured. BB Generally lack characteristics of desirable investment. CCCCaa Poor standing. Vulnerability to default. CC Extremely poor prospects. DD In default

4. 3 © 2013 PFM Asset Management LLC U.S. Treasuries SLGS Federal Agencies Mortgage Backed Securities Security Types U.S. Government Municipals Corporates General Obligation Bonds Revenue Bonds Commercial Paper Bankers’ Acceptances Corporate Notes Certificates of Deposit Mutual Funds Repurchase Agreements

5. 4 © 2013 PFM Asset Management LLC Issuer:U.S. Government Credit Quality:“Risk Free” Liquidity:High (active market) Custody:Federal Reserve (Book entry) U.S. Treasury Obligations TypeTerm to MaturityInterestPrice QuotesMaturity BILLS1, 3, 6, 12 monthsInterest at Maturity Discount (Not equal to yield) Thursdays NOTES2-10 yearsSemi-Annual CouponPrice per $100 15th or last day of month BONDS10-30 yearsSemi-Annual CouponPrice per $100 STRIPS3 months-30 yearsInterest at Maturity Discount (Not equal to yield)

6. 5 © 2013 PFM Asset Management LLC 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 Federal Agency/GSE Obligations

7. 6 © 2013 PFM Asset Management LLC 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”) Most Common GSE Issuers

8. 7 © 2013 PFM Asset Management LLC Repurchase Agreements 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” Investor Counterparty Transaction Begins Transaction Ends Cash Securities Delivery vs. Payment Securities Returned to broker/dealer who “re-purchases” them Cash + Interest

9. 8 © 2013 PFM Asset Management LLC Repurchase Agreements Issuer:Banks and brokerage firms Credit Quality:Varies Term of Maturity:1 day to several years Liquidity:Generally none prior to maturity Custody:Book entry (collateral) Return:Generally higher than Treasuries Caution:Investors should require a third party custodian Monitor credit quality of counterparty and collateral value

10. 9 © 2013 PFM Asset Management LLC Issuer:Domestic and foreign corporations Credit Quality:Investment grade Term of Maturity:1 to 270 days Liquidity:Moderate to high Custody:Depository Trust Company (Book Entry) Return:Moderate to high Caution: Unsecured promissory note Bankruptcy risk extends for 90 days after maturity May be asset-backed Commercial Paper

11. 10 © 2013 PFM Asset Management LLC CP issued by a special purpose corporation to finance receivables or purchase assets Allows institutions to shift liabilities off of their balance sheets Asset Backed Commercial Paper

12. 11 © 2013 PFM Asset Management LLC Issuer:Commercial banks Credit Quality:Based on bank rating Irrevocable obligation of issuing bank Term of Maturity:Up to 180 days Liquidity:Moderate to high Custody:DTC (Book entry) or Physical Return:Moderate to high Caution: Foreign banks may impose additional credit risks Bankers’ Acceptances Time drafts used in international trade.

13. 12 © 2013 PFM Asset Management LLC Issuer:Commercial Banks, Savings & Loans Credit Quality: Varies First $250,000 insured by FDIC* May be secured by pledged collateral Term of Maturity:Greater than 7 days Liquidity:Low to moderate Custody:DTC (Book entry) or Physical Return:Moderate (depends on credit quality) Caution:Non-negotiable CDs have withdrawal penalties Certificates of Deposit * 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. 13 © 2013 PFM Asset Management LLC Corporate Notes Issuer:Publicly owned corporations Credit Quality:Varies Term of Maturity:1 - 40+ years Liquidity:Moderate Custody:DTC (Book Entry) Return:High, depends on credit and structure Caution:Unsecured promissory note Credit analysis required

15. 14 © 2013 PFM Asset Management LLC Longer maturities typically generate higher returns over time. But, longer maturities experience greater volatility. How Maturity Impacts Long-Term Returns 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. The History of Money Market Funds 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.

18. 17 © 2013 PFM Asset Management LLC 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 Other “Money Markets”

19. 18 © 2013 PFM Asset Management LLC 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 LGIPs vs. RICs

20. Market Forces Affecting Funds

21. 20 © 2013 PFM Asset Management LLC 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) Money Market Funds

22. 21 © 2013 PFM Asset Management LLC 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). FOMC - “The Fed”

23. 22 © 2013 PFM Asset Management LLC Historic Federal Funds Target Rate

24. 23 © 2013 PFM Asset Management LLC 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 LIBOR

25. 24 © 2013 PFM Asset Management LLC LIBOR

26. 25 © 2013 PFM Asset Management LLC 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. Disclaimer