© 2012 Northern Trust Corporation Presented by: The Northern Trust Company Elizabeth V. Hasten,CTP Windy City Summit CTP Review Chapter 11 ServiceExpertiseIntegrity

ExpertiseService 2 Windy City Summit CTP Review Chapter 11 Money Markets, Short-Term Investing and Borrowing

IntegrityExpertiseService 3 Windy City Summit CTP Review Global Money Markets Money Market Participants Government entities Securities dealers Commercial banks Corporations Individuals Broker-dealer

IntegrityExpertiseService 4 Windy City Summit CTP Review Global Money Markets Types of Money Market Instruments and Investments Commercial Paper (CP)- tradable promissory notes issued by companies at a discounted price (liquid but not secured) Asset-backed commercial paper- CP that is secured against a specific asset Bank Obligations- time deposits such as CDs Government Paper (T-bills)- tradable promissory notes issued by governments Floating rate notes- promises to return face value plus interest Repurchase agreements (repos)- bank or dealer sells securities agreeing to buy them back later at a higher price Money Market Funds- comingled pools of money market instruments Short-Duration Mutual Funds- invest in securities with longer maturities than most money market instruments Sweep Accounts-loan sweeps

IntegrityExpertiseService 5 Windy City Summit CTP Review Short-Term Money Markets in the U.S. Processing and Clearing of Short-Term Investments Commercial Book Entry System(CBES)- Delivery system for the simultaneous transfer of securities against the settlement of funds Depository Trust and Clearing Corporation (DTCC)- Provides clearing, settlement and information services for bonds, money market instruments, securities and derivatives U.S. Money Market Participants U.S. Treasury and federal agencies Commercial banks Thrifts Municipalities Corporations Federal Reserve Securities dealers

IntegrityExpertiseService 6 Windy City Summit CTP Review Short-term Money Markets in the U. S. U. S. Money Market Instruments U.S. Treasury Bills: usually exempt from state income tax, mature in less than one year and are sold through a sealed bid auction Bank Debt Obligations: FDIC insured Commercial Paper: has maturity of less than 270 days, evaluated by rating agencies and is issued by large corporations, and non-bank finance companies U.S. Federal Agency and Government-Sponsored Enterprise (GSE) Securities: carries explicit or implied guarantee by the U.S. government (Ginnie Mae) Municipal Notes, Variable Rate Demand Obligations and Tax- Exempt Commercial Paper: mature in 3 months- one year Money Market Funds: prime, government, treasury and tax-exempt classes, sold in shares by banks, fund providers and investment brokers

IntegrityExpertiseService 7 Windy City Summit CTP Review Managing Short-term Investments Short-Term Investment Policy Focuses on liquidity maintenance and principal preservation, based on risk tolerance In-House Management vs. Outsourced Management In-house expensive for small companies and small investment portfolios Policies and guidelines must be communicated clearly to outside manager when outsourced Investment Strategies Buy-and-hold-to-maturity Actively managed Tax-based Reliable Reporting

IntegrityExpertiseService 8 Windy City Summit CTP Review Managing Short-term Investments Securities Safekeeping and Custody Services Focuses on liquidity maintenance and principal preservation, based on risk tolerance Investment Risk Considerations and Factors Influencing Investment Pricing Credit or Default Risk (higher yields, higher risk) Asset Liquidity Risk Price/Interest Rate Risk Foreign Exchange (FX) Risk

IntegrityExpertiseService 9 Windy City Summit CTP Review Pricing and Yields on Short-Term Investments Factors Influencing Investment Pricing Yield : measure of return on investment Yield curves Tax status Taxable Equivalent Yield = Tax Exempt Yield (1-Investors Marginal Tax Rate) Yield Calculations for Short-Term Investments Yield calculation principles and examples Holding Period Yield= Cash Received at Maturity – Amount Invested Amount Invested Annual Yield= Holding Period Yield x Days in Year Days to Maturity

IntegrityExpertiseService 10 Windy City Summit CTP Review Managing Short-Term Financing Short-Term Funding Alternatives Trade credit syndications and participations Internal borrowing Selling of receivables Commercial bank credit Loan syndication and participations Line of credit Revolving credit agreement Single payment notes Repurchase agreement Commercial paper Issuance Asset-based borrowing

IntegrityExpertiseService 11 Windy City Summit CTP Review Dollar Discount =Par Value – Purchase Price =Cash received at maturity – amount invested =Discount Rate x Par Value x Days to Maturity 360 Discount Rate= Dollar Discount x 360 Par valueDays to maturity Money Market Yield= Holding period yield x 360 (based on 360 day year) Days to maturity Bond Equivalent Yield = Holding period yield x 365 (based on 365 day year) Days to maturity Managing Short-Term Financing

IntegrityExpertiseService 12 Windy City Summit CTP Review Bond Equivalent Yield = Holding period yield x 365 (based on 365 day year) Days to maturity = Money market yield x Bond equivalent yield will always exceed the money market yield Money market yield will always exceed the discount rate Purchase Price = Par Value – Dollar Discount Managing Short-Term Financing

IntegrityExpertiseService 13 Windy City Summit CTP Review Annual Cost of Commercial Paper Issuance = Dollar Discount = Discount Rate x Par Value x Days to Maturity 360 Usable Funds = Par value – Dollar Discount Prorated Dealer Fee = Annual Fee Rate x CP Issue Size x Days to Maturity 360 Prorated Backup Line = Annual Line Rate x CP Issue Size x Days to Maturity of credit Fee 360 Annual Interest Rate=Dollar Discount + Dealer Fee + Backup Line Fee x 365 Usable Funds 360 Commercial Paper Nominal Yield = Dollar Discount x 365 Purchase Price Days to Maturity Managing Short-Term Financing

IntegrityExpertiseService 14 Windy City Summit CTP Review Managing Short-Term Financing Managing Short-Termnancing Annual Cost of Line of Credit= Interest Paid = Average Borrowing x All-in-Rate Fee on Unused Portion = Unused Portion x Commitment Fee Annual Interest Rate = Interest Paid+ Fee on Unused Portion Unused Portion of Line (-Compensating Balance) Avail. Amt = Borrowed Amt –(Compensating Balance %) x (Borrowed Amt) Borrowed Amount = Available Amount 1-(Compensating Balance %)