The Tools & Techniques of Investment Planning, 5th Edition

By Stephan Leimberg, Michael P. Daly and Todd J. Mulligan

The Tools & Techniques of Investment Planning, 5th Edition is an easy-to-read desktop companion for financial planning practitioners. It demystifies the process of investing by providing practical insights into the strengths and weaknesses of different investment approaches and asset classes, and highlights strategies for managing portfolios in the contemporary investment climate.

This book emphasizes not only perspective, but also how to apply investment theory to support unique client objectives, and to assign investments based on the financial risk reward continuum and any client's appetite for risk.

This must-have resource includes:

• Detailed descriptions of complex investment products and strategies
• Easy-to-read explanations of how various investment products work and when they should and should not be employed
• Clear, thorough examples showing exactly how various investment products and strategies generate income and gains in volume, and how these gains can be incorporated into investment strategies to meet specific real-world goals
• Comprehensive explanation of investment-related tax concepts, enabling investors and planners to devise tax-efficient strategies in conjunction with client's tax and legal professionals
• Thoughtful, independent advice about the best products and strategies for specific situations

What's New in this Edition

• The latest tax changes associated with SECURE Act 2.0, the SECURE Act and the Tax Cuts and Jobs Act, including the tax and beneficiary rule changes and how those changes apply to the investment activities of individuals, trusts, estates, and IRA beneficiaries.
• Tax and planning updates under SECURE Act and SECURE Act 2.0, in particular changes on IRA beneficiary planning strategies that were removed.
• New content around Portfolio Management Strategies, including Environmental, Social, and Governance Investing, as well as Market Cycles, Sector Rotation investing, and Core-Satellite approaches.
• Tax rate, capital gain, and tax structure updates with 2024 numbers.
• Updated and enhanced examples provide real-world investment scenarios that help readers to understand how investment performance is achieved and monitored.

• Language: English
• Publisher: The National Underwriter Company
• Release date: Apr 22, 2024
• ISBN: 9781588528599

Book preview

5TH EDITION

The Tools & Techniques of

Investment Planning

LEIMBERG LIBRARY

Stephan R. Leimberg

Michael P. Daly

Todd J. Mulligan

Copyright & Terms of Use

Use of this electronic publication (eBook) from ALM Media Properties, LLC (ALM), is for the personal use of above buyer only and is subject to the following terms and conditions. All access to and use of this eBook is subject to U.S. copyright law. All intellectual property rights are reserved to the copyright holder. Redistribution or duplication of this eBook, including but not limited to any other electronic media or third party, is strictly prohibited. Under no circumstances may you redistribute this eBook by posting this eBook on an intranet, internet or SharePoint site or in any other manner. Any transfer of this eBook is strictly prohibited. Use of this eBook is also subject to the terms and conditions of use located at https://www.alm.com/terms-of-use/.

ISBN 978-1-58852-859-9

This publication is designed to provide accurate and authoritative information

in regard to the subject matter covered. It is sold with the understanding

that the publisher is not engaged in rendering legal, accounting

or other professional service. If legal advice or other expert assistance is

required, the services of a competent professional person should be sought. –

From a Declaration of Principles jointly adapted by a Committee of The

American Bar Association and a Committee of Publishers and Associations.

Copyright © 2004, 2006, 2014, 2017, 2024

ALM Global, LLC

150 E. 42nd St.

New York, NY 10017

Fifth Edition

All rights reserved.

No part of this publication may be reproduced, stored in a retrieval

system, or transmitted, in any form or by any means, electronic,

mechanical, photocopying, recording, or otherwise, without prior

written permission of the publisher.

Printed in the United States of America

About ThinkAdvisor

A note about our branding: You may have noticed that we are no longer using the National Underwriter brand and are now using the ThinkAdvisor brand. At ALM Global, LLC, we are working to align our expansive tax and finance portfolio to make pertinent coverage more accessible. ThinkAdvisor is a global information, data, intelligence and content company with reporters and editors all over the world and its writers follow the biggest news events across a range of professional markets, including law, commercial real estate, insurance and investments. Although we have a new look, all of the valuable content is still in the same place; only the branding has changed.

What is ThinkAdvisor?

ThinkAdvisor is part of ALM Global, LLC, a global information, data, intelligence and content company with reporters and editors all over the world. The ALM network of writers follows the biggest news events across a range of professional markets, including law, commercial real estate, insurance and investment advisory. We work hard to identify trends earlier than anyone else and to bring an analytical lens to our coverage that helps you do your job better. We invite you to check out our sister brands, including PropertyCasualty360, BenefitsPro and GlobeSt.

Will my user experience change?

Your customer experience will not change. The logo on your print and online products will be different; however, the content will continue to be updated in print, online and ebook formats.

Updates

Our publications are regularly updated to include coverage of developments and changes that affect the content. If you did not purchase this publication directly from ALM Global and you want to receive these important updates sent on a 30-day review basis and billed separately, please contact us at [phone]. Or you can mail your request with your name, company, address, and the title of the book to:

Customer Service

ALM Global, LLC

4157 Olympic Boulevard

Suite 225

Erlanger, KY 41018

If you purchased this publication from ALM Global, directly, you have already been registered for the update service.

Contact Information

To order any ALM Global title, please:

call 1-800-543-0874, 8 to-6 ET Monday – Thursday and 8 to 5 ET Friday,

contact our online bookstore, still located at www.nationalunderwriter.com, or

send a letter to Customer Service, ALM Global, LLC, 4157 Olympic Blvd., Suite 225, Erlanger, KY 41018.

Digital versions of your favorite publications are still available on https://onlinelibrary.nuco.com.

---

DEDICATION

Michael P. Daly

To all the professionals that built this industry and to those professionals that are becoming the stewards for it.

Todd J. Mulligan

To Jess, Zach, and Emilia

---

ABOUT THE AUTHORS

Stephan R. Leimberg

The late Stephan R. Leimberg was the CEO of Leimberg and LeClair, Inc., an estate and financial planning software company, CEO of LISI, Leimberg Information Services, Inc., an email newsletter service, and President of Leimberg Associates, Inc., a publishing and software company. He was an Adjunct Professor in the Masters of Taxation Program of Villanova University School of Law and former adjunct at Temple University School of Law. He held a B.A. from Temple University, and a J.D. from Temple University School of Law. Leimberg was also the Editor of the American Society of Financial Service Professionals audio publication, Keeping Current.

Leimberg was the author or co-author of numerous books on estate, financial, and employee benefit and retirement planning and a nationally known speaker. Leimberg was the creator and principal author of the entire Tools & Techniques series including The Tools & Techniques of Estate Planning, The Tools & Techniques of Financial Planning, The Tools & Techniques of Employee Benefit and Retirement Planning, The Tools & Techniques of Life Insurance Planning, The Tools & Techniques of Investment Planning, and The Tools & Techniques of Risk Management.

Michael P. Daly

Michael P. Daly, CSOP, CFIRS, CCTP is the San Francisco based Director of Risk Management and Operations for Pohl Consulting and Training, Inc. He is a high-energy professional with over 30 years of experience in the securities industry. He has an MBA in international business from the Thunderbird School of Global Management. Mike’s work in senior management roles in fiduciary risk management, administration and operations has given him a broad industry perspective.

Today, Mike is focused on paying it all forward. Mike works with Cannon Financial Institute, the Leimberg Library and other professional organizations to mentor the next generation of securities industry professionals. For over a decade, Mike served as Chair of the ICB/ABA Certification of Securities Operations Professionals. He served on the Board of Directors of the Fiduciary Investment Risk Management Association (FIRMA) for 8 years, and has been a frequent contributor to the ABA’s Trust and Investment Magazine and the Journal of Financial Compliance.

Mike’s path to the securities industry was not traditional. Mike began his career in the motion picture and television industry working at Paramount Studios in Hollywood. As the entertainment industry pivoted to the securities market to raise capital for entertainment products. Mike pivoted too. He took a hiatus from the factory work of a motion picture studio and transitioned to the glamour and glitz of banking and finance.

Beginning with the development and implementation of a securities lending business at a multinational regional bank on the west coast, Mike was soon taking on new projects and exploring the continuing evolution of finance through securities and securitization. Before long Mike expanded his knowledge and experience in various areas of fiduciary services, from retirement plan services to corporate trust. Along the way he has seen and has survived major market expansions, significant market collapse, regulatory change and market recovery. He’s witnessed firsthand how markets impact not only investing, but the very nature of investments. Having watched an industry transform through technology and travesty, Mike recognizes and leverages the lessons of history in both his philosophy and his professional practice.

Mike is always curious, and his passions are diverse, from traveling the world to explore new cultures, traditions, and recipes, to finding dusty bookshelves in pursuit of new knowledge. His most rewarding pursuit has been sharing this knowledge and personal experience about this amazing and rewarding industry.

Todd J. Mulligan

Todd J. Mulligan, CFA, CFP®, CAIA is a Certified Financial Planner™ Practitioner based in the greater Boston area. Day to day, Todd focuses on creating and implementing comprehensive financial plans and investment strategies for high net-worth individuals and families both in New England and throughout the United States.

Over the years, Todd has earned numerous awards and accolades for financial planning, investment management, and client service from various financial publications. He holds the CERTIFIED FINANCIAL PLANNER™ and Chartered Financial Analyst designations, as well as the Chartered Alternative Investment Analyst designation. These advanced certifications have given him knowledge about and insight into a wide variety of financial planning and investment topics.

Since 2016, Todd has been creating and teaching Investment Planning courses for Boston University and its financial planning program. His coursework, which is focused on investment and risk management, as well as portfolio construction strategies, covers the topics required to sit for the CFP® Exam. In addition to teaching, in the past Todd has served as a Content Editor and author for Wiley and Sons publishing company on various financial planning topics, largely focused on portfolio construction and investment management.

Todd has also served in several volunteer roles for the CFA institute and CFA Society of Boston, including roles on the Private Wealth Committee and the Mentor Committee. More recently, Todd was asked to serve as a volunteer content expert for the Global Private Wealth Management panel for the CFA Institute. In this capacity, he helped to shape the future of Wealth Planning topics that will be covered on future CFA exams.

Todd lives in the Boston suburbs with his wife Jess and children Zach and Emilia. Outside of working and writing, Todd enjoys rooting for New England sports teams, running, reading, and spending outdoor time with his family. Todd graduated from Colgate University in 2006, where he also played Division 1 college football.

---

PREFACE

In this 5th Edition of Tools and Techniques of Investment Planning, we continue the tradition of the Tools and Techniques series by providing current relevant guidance on investments for the expert practitioner and novice alike. The financial markets have become increasingly complex and require both a broad and deep understanding in order to effectively plan to meet the objectives of both individual and institutional investors. This edition of the book has been updated and organized to deliver that broad and deep understanding.

Further, Introduction to Investment Planning provides the context for the remainder of the book and emphasizes a process orientation to investment planning. The Tools Section of the book provides an understanding of the types of investments that should be part of the toolbox of every practitioner, with details on each tool’s advantages and disadvantages. The Techniques Section shows how to use the tools to design an investment policy and strategy to meet an investor’s needs.

In addition to the usual comprehensive updates, this edition contains a updates on the Tax Cuts and Jobs Act, The Secure Act, and Secure Act 2.0 including applicability to individuals, trusts, estates, and IRA beneficiaries. Lastly, we have expanded investment concepts in Portfolio Management to include new material on Environmental, Social, and Governance Investing, as well as Market Cycles, Sector Rotation investing, and Core-Satellite approaches.

This volume extends the work done by Stephan R. Leimberg and a number of contributors over the years to a series of Tools and Techniques books each of which are your learning, refresher, and reference source for the most important investment concepts in financial planning.

We welcome your comments, suggestions, and constructive criticism. Please send us your ideas.

Michael P. Daly

Todd J. Mulligan

March 2024

---

PART I: TOOLS OF INVESTMENT PLANNING

---

CHAPTER 1: INTRODUCTION TO INVESTMENT PLANNING

1.1 INTRODUCTION

Both individual and institutional investors plan for the future. Investment planning plays a key role in helping investors achieve their goals and fulfill their missions. Investment planning is the process an investor or investment adviser uses to create and manage an investment portfolio. This investment planning process is depicted in Figure 1.1.

Figure 1.1. Investment Planning Process

It is a continuous process that starts with an initial assessment of the client, and the portfolio, and is accompanied by periodic reassessments to determine what adjustments, if any, are required to the investment plan. In this chapter, we will introduce each of the steps in the process, and will provide the reader a roadmap of the rest of the book.

1.2 CLIENT ASSESSMENT

The first step in any investment planning process is to assess the client and the existing portfolio, as well as the client’s objectives, constraints, and preferences. An individual investor needs a thorough understanding of their existing financial, tax, and family situation. A financial planner will need to understand the investor’s investment experience and their risk tolerance. The objective could be planning for retirement, for college tuition, or for a major purchase such as a home. Some investors have liquidity constraints, while others have opinions and preferences as to the types of securities they are comfortable holding. Institutional investors typically serve as intermediaries for money held for the benefit of others and include pension funds, foundations, endowments, insurance companies, banks, even other financial intermediaries. Management of institutional funds requires an understanding of the nature of the corporate entity, its investment policy, and its tax status and objectives.

1.3 CAPITAL MARKETS ASSESSMENT

In addition to the understanding that client investment planning requires recognition of the existing economic environment and an assessment as to how different types of investments (asset classes) are expected to perform in the environment (from both a risk and a return perspective). These expectations are built on the current market conditions and the economic environment, but can only be based on historical risk and return relationships.

1.4 STRATEGIC ASSET ALLOCATION

Once the investment adviser has assessed both the client, and the capital markets, the next step is to design a target portfolio for the client. This portfolio should be designed to provide sufficient return to meet the client’s objectives while managing the risk to a level both acceptable and palatable to the client. The most important concept in portfolio design is diversification – both diversification between types of investments and diversification within each type. There are a variety of types of investment alternatives that can be used to create an investment portfolio. Generally, the more types of investments that are included in a portfolio’s construction, the lower the risk of the portfolio. Within an investment type, the more individual securities that are included, generally the lower the risk (up to a limit).

What types of investments can be included in a portfolio? There are three core asset types that capture the broadest of investment categories

Real Assets

Business Ownership Interests

Debt Instruments

Real assets include investments in hard and fixed assets like real estate, commodities, or even equipment. Returns on these assets might come from appreciation and/or income received from lending the asset to someone else. Ownership interests in a business could include partial or whole ownership of an unincorporated closely held company, or it might be shares of stock of a large, publicly traded company. Returns may come from distributions of earnings, or from market price appreciation. Debt instruments represent loans made from the investor to another party for which the investor is promised both interest income for the use of the funds, along with a return of all the principal loaned. A variety of other investments can be devised from these core elements. The investments derived from these core elements are known as Derivatives.

In the early days of investment planning, the main focus was on portfolios of publicly available fixed income securities (bonds) and equities (stocks). Stocks and bonds are often referred to as traditional investment. Investments in real assets (such as real estate) actually predate the existence of stocks and bonds. Fixed assets are not classified as traditional investments, and are instead referred to as alternative investments. There are a large variety of investment types which are typically categorized into broad assets classes such as:

Fixed Income Investments (Bonds)

Equity Investments (Stock)

Derivatives (Derived from stocks or bonds)

Alternative Investments (Fixed assets)

Fixed income investments include cash, notes, bonds, guaranteed investment contracts, and other similar instruments. Equity investments generally include publicly traded common and preferred stock. Derivatives include options and futures on stocks, bonds, or real assets, and typically offer a return based on the return of some other underlying asset. Alternative assets include real estate, commodities, asset backed securities, and nonpublicly traded equity investments (private equity and venture capital). Asset classes are often split into subclasses. For example, fixed income investment subclasses can include cash, government bonds, municipal bonds, and corporate bonds. Equity investment subclasses can include growth stocks, value stocks, small capitalization stocks, midcapitalization stocks, large capitalization stocks, and even international stocks.

Strategic asset allocation is the process of determining which assets classes to include in a client’s portfolio and in what proportion. The strategic asset allocation is designed to meet long-term objectives using long-term risk, return, and relationship expectations based on the client’s risk tolerance, time horizon, and idiosyncratic preferences.

1.5 TACTICAL ASSET ALLOCATION

A tactical asset allocation is a short-term adjustment to a long-term asset allocation strategy based on the short-term performance of different asset classes. For example, a client may have a strategic asset allocation that calls for an allocation of 30 percent in long-term government bonds, but the adviser expects a near term increase in interest rates based on an expected change in the monetary policy of central banks. The adviser might reduce the current exposure to long-term government bonds with the expectation of returning to the long-term strategic allocation in the future, once interest rates stabilize. Strategic asset allocations are most effective when they are expressed in ranges (for example, a policy of 25 to 35 percent in long-term government bonds rather than a fixed 30 percent allocation).

1.6 SECURITY OR MANAGER SELECTION

Once the tactical asset allocation has been determined, and the range of what percentage to invest in each asset class has been established, the adviser determines what securities to purchase within a particular asset class. This is done using investment tools such as fundamental analysis, technical analysis, or indexing. The investment adviser might also choose pooled investment vehicles such as mutual funds or ETFs to further diversify, or might select a money manager to manage the underlying securities.

1.7 MONITORING

Once an investment plan has been implemented, after the strategic asset allocation strategy has been created and the underlying securities have been purchased, the adviser must continuously monitor the portfolio. This process involves an assessment of all of the portfolio’s underlying securities to make sure they are performing in line with expectations and to assess the potential impact of any major news or changes to general economic conditions.

1.8 REBALANCING

Any portfolio’s percentages of allocation to various asset classes will shift as asset classes perform differently over time. Rebalancing is the process of selling positions in an asset class that has outperformed and adding to positions in asset classes that have underperformed in order to get back to the target strategic asset allocation. Rebalancing can be based on a calendar approach (for example, every quarter) or a corridor approach (monitoring when an asset class strays plus or minus 5 percent from its target allocation).

1.9 PERFORMANCE EVALUATION

In addition to monitoring and rebalancing, an adviser must also disclose. Periodically, an adviser must report to the client how the portfolio is performing. There are a variety of techniques for evaluating and reporting performance, such as return metrics, risk-adjusted return metrics, and benchmarking. Over time, an adviser must re-assess the client’s situation and capital market expectations and make any necessary adjustments to the long-term strategic asset allocation. Adjustments to the long-term allocation should only be made occasionally (every three to five years or so); an adviser should closely monitor changes in the client’s situation or objectives, and review them at least annually. Strategic asset allocation should also be revisited when there is substantial change in the capital market itself.

1.10 ORGANIZATION OF THIS BOOK

This book presents the tools and techniques needed to successfully plan and manage investments for any institutional client, and for the individual investor. In the Tools section, we present the various asset classes (fixed income, equity, derivatives, and alternative investments) and discuss the individual investment types available within each of those asset classes. In addition, we include chapters on pooled investments that aggregate assets within asset classes (such as mutual funds, ETFs, hedge funds, and other structured products). There are chapters on insurance products, which have embedded within them some of these asset classes (life insurance and annuities). Within each chapter of the Tools section, we describe:

what the investment is;

when its use is indicated; or considered appropriate;

the advantages;

the disadvantages;

the tax implications;

where and how to invest;

fees;

how to select the best asset type; and

where you can find more information.

In the Techniques section of the book, we show how the tools can be used to design portfolios for individual or institutional clients. We also show how risk and return is measured and how to evaluate the performance of securities and portfolios.

The appendices provide a variety of valuable tables for use in your practice ranging from present and future value tables to tax tables.

---

FIXED INCOME INVESTMENTS

---

CHAPTER 2: CASH AND CASH EQUIVALENTS

2.1 INTRODUCTION

Cash investments represent more than physical currency; they also include investments in bank deposits (certificates of deposit and bank savings accounts) and investments in short-term debt backed by the full faith and credit of the United States (United States Treasury issues). Cash investments also include mutual funds that invest exclusively in short-term debt with minimal credit risk (money market mutual funds). The main goal of cash and cash equivalent investments is to preserve capital.

A Certificate of Deposit (CD) is a debt instrument issued by a commercial bank, savings and loan, credit union, or other thrift institution in exchange for a deposit made by an investor. CDs are usually issued in minimum amounts of $5,000, but are increasingly available in smaller denominations. The life, or term of these certificates, can range from seven days up to ten years. Interest rates on these certificates are frequently tied to the rate paid on United States Treasury investments of comparable maturity range.

A money market fund is a mutual fund that invests solely in short-term debt instruments. The term money market refers to high quality, short-term debt instruments that mature within one year. These debt instruments could include any combination of the following:

United States Treasury Bills – short-term certificates issued by the federal government with maturities of three months to one year.

Certificates of Deposit (CD) – include certificates issued by domestic and foreign financial institutions. The risk associated with a foreign CDs is higher than a domestic CD, as a result and to attract investors, foreign CDs tend to pay a slightly greater rate of return. Most money market funds diversify their portfolios by holding a combination of both foreign and domestic certificates of deposit.

Commercial Paper – short-term corporate debt (bonds) with maturities of sixty days to one year.

Bankers Acceptances – a short-term credit guarantee of payment by a bank lasting thirty to 180 days. These are financial instruments representing a commitment by a bank of future payment. Used most commonly to finance international import/export transactions. As an investment these instruments are considered relatively safe and trade in the secondary market.

Municipal Paper – issued by state, county, or local governments or agencies, where interest earned is exempt from federal income taxes and state and local income taxes depending on the investor’s residency.

Eurodollar Investments – time deposits denominated in United States dollars, but held by banks headquartered outside of the United States, or in foreign branches of United States banks. The minimum investment is typically $1,000,000, and trading is active in instruments with maturities up to six months. The term Eurodollar is used on a worldwide basis, not just for deposits held in Europe.

2.2 WHEN IS THE USE OF CERTIFICATES OF DEPOSIT AND MONEY MARKET FUNDS INDICATED?

When an investor needs liquidity and the ability to easily convert an investment into cash quickly with little or no cost. These are ideal investment vehicles for those investors finding themselves with large amounts of idle capital requiring investment for short periods of time and minimal risk.

When there is a need or desire for the safety of invested principal. For the investor, this security is provided by the combination of short maturities, the high quality of the issuers, and the diversification across various types of cash equivalent securities and issuers.

When an investor craves a higher rate of return than is available from a passbook-type savings account or from holding cash itself which yields no return.

When immediate access to the funds is required. (However, the premature redemption of a CD will generally result in some type of penalty – for example, the forfeiture of a portion of interest earned to date.)

2.3 ADVANTAGES OF CERTIFICATES OF DEPOSIT AND MONEY MARKET FUNDS

CDs are generally insured by the banks with a balance of up to a maximum of $250,000 per account name. Individuals investing more than this amount might open accounts with different ownership titles (such as husband only and wife only) or they might open accounts at different banks to maximize the government insurance protection of their funds. Some banks participate in insurance deposit marketplace networks with other banks, allowing a customer to deal with one bank but have the deposits effectively spread among multiple banks to ensure insurance limits of any one bank are not exceeded. Money market mutual funds are not deposits and are therefore not guaranteed by a government agency.

An investment in a money market mutual fund can easily be converted into cash, and most banks allow redemption of their CDs prior to maturity. There are usually penalties for early withdrawal of funds from a bank CD. For example, an investor who wants to redeem a six-month certificate after three months might be charged the equivalent of one month’s interest as a penalty. Another type of bank-imposed penalty is a reduction in the interest rate on the certificate.

CDs are sometimes purchased with maturities that match an investors’ short-term liquidity need. This technique is advantageous for investors looking for a safe, liquid, and a shorter-term investment simply to hold cash temporarily, but profitably, while considering other investments.

Another technique used by investors in this space is to purchase a portfolio of certificates with differing maturities. For example, an investor with $100,000 could purchase four $25,000 CDs, from different banks, with each maturing at the end of each of the next four years.

Many money market mutual funds often allow shareholders check writing services and/or the ability to wire money from the fund directly to the investor’s personal bank account.

Because of the financial strength of the issuers, and the relative safety of the underlying assets, money market mutual funds are considered secure investments. The investor can expect little or no fluctuation in the market value and return of capital is virtually assured.

The rate of return offered by money market funds is sensitive to changes in interest rates. This means that if rates increase, the return provided by the fund will likely follow. This is because holdings of the typical money market mutual fund turn over. Some of the underlying assets naturally mature and will be reinvested in newer shorter-term instruments impacted by the rate change. .

Money market mutual funds do not typically impose a fee on new purchases or a redemption fee when shares are sold. However, there are management fees that can and do vary. Typically, a management fee of 0.15 percent to 0.5 percent is applied annually. An administrative charge might also apply to accounts with balances below a certain level, such as $10,000.

Certificates of deposit investments can be laddered with staggered maturity dates in a technique to manage interest rate risk. There is typically a positively-sloped yield curve with higher interest rates on longer-term maturities. So, an investor can achieve a higher interest rate on longer term CDs. But if liquidity is required in the shorter term, or interest rates rise, staggering CD investments into six-month, twelve-month, eighteen-month, twenty four-month and thirty-month maturities could result in a higher interest rate than a single six-month maturity, plus it allows the investor to reinvest at the higher interest rates as each six-month CD matures and is re-invested at the new prevailing interest rates.

Money market mutual funds can be designed with the tax-exempt investor in mind. Some funds are exempt from federal tax but subject to state tax, while other funds invest wholly in a single state (less diversified) and are exempt from federal and state tax for state residents.

2.4 DISADVANTAGES OF CERTIFICATES OF DEPOSIT AND MONEY MARKET FUNDS

The rate of return on CDs is generally much lower than rates typically available on higher risk investment alternatives. For example, CDs typically pay a rate of interest below that paid on long-term government bonds. An even higher rate of return might be available in corporate bonds, but they carry much higher investment risk.

The penalty charged should an investor redeem the certificate prior to maturity could be substantial. The penalty alone could significantly reduce the overall rate of return on the investment.

Generally, money market funds do not pay as high a rate of return as longer-term investments, such as bonds. Therefore, as an investment cash equivalent investing is not appealing to all investors.

The income generated through cash equivalent investing will generally be taxed as ordinary income. An investor must report all income as ordinary income.

Money market mutual funds are not insured or guaranteed by any federal agency. Unlike banks are federally mandated to maintain reserve requirements, money market mutual funds are lightly regulated.

2.5 TAX IMPLICATIONS OF INCOME FROM CERTIFICATES OF DEPOSIT AND MONEY MARKET FUNDS

All income from CDs and money market mutual funds is fully taxable and subject to ordinary income tax rates. Money market mutual fund dividends are considered interest payments for tax purposes.

CDs will be redeemed at maturity for their original investment value. Therefore, there can be neither a capital gain nor a capital loss (appreciation/depreciation) with this type of investment. For example, Suzanne Carnes invested $50,000 in a six-month certificate of deposit. At maturity, the bank will return her $50,000 for the certificate. Thus, there is no capital gain or loss.

The penalties paid by investors who redeem CDs prior to the maturity date are deductible for federal income tax purposes. For example, if Suzanne Carnes redeemed her CDs two months before it would have matured, the penalty paid to the bank is deductible (the penalty is deducted from the interest and/or principal she receives).

The taxpayer may deduct the entire penalty even if it exceeds interest income. Both the interest and the penalty are reported to the taxpayer on Form 1099-INT by the financial institution issuing the certificate.

Some money market funds specialize in short-term, tax-exempt investments. The income received from these funds might be tax-free and therefore not eligible for federal income tax, or is the income subject to the effects of the alternative minimum tax (see Chapter 46, Taxation of Investment Vehicles). Some mutual fund money markets specialize specifically in state tax-free investments, allowing them to be exempt from both federal and state income tax for state residents. These funds are most prevalent in high income tax states such as New York, California, and Ohio.

2.6 ALTERNATIVES TO CERTIFICATES OF DEPOSIT AND MONEY MARKET FUNDS

Treasury bills are similar to certificates of deposit. The timing of maturities, the safety of principal, and the amount of required initial investment are comparable to investing in bank CDs. Interest on United States Treasury investments is exempt from state income tax. Most individual investors find it easier to deal with their local banks than to purchase Treasury bills through the Federal Reserve System, but that is changing. United States Treasury investments can be purchased online at www.treasurydirect.gov Banks do offer a slightly higher return on their CDs than that available from Treasury bills. United States Treasury bills, notes, and bonds are considered to be the safest investments available in the marketplace and, as such, will typically pay a lower rate of interest than a bank savings accounts or a bank certificates of deposit. Bank investments are always riskier than US government securities.

Some corporations issue short-term investment notes to investors. These notes typically have maturities ranging from three months up to one year. The interest rates paid on these notes are generally higher than bank CDs of comparable maturity, but corporate notes vary widely in terms of quality, and are not insured.

Commercial banks, savings, and loans offer money market deposit accounts. The interest rate paid on these accounts is normally lower than the rate paid by money market mutual funds. However, money market deposit accounts are more convenient for an investor because they can be easily obtained at the same location where the investor banks, and the accounts are also insured subject to the insurance limits of the various deposit insurance agencies of the federal government.

Prime funds are an alternative to money market funds. Prime funds are closed-end mutual funds with a goal to provide yields that match the prime rate or higher. To provide higher yields, prime funds must invest in higher risk securities. Prime funds typically invest in floating rate, secured corporate bonds. An advantage of prime funds is that when interest rates rise, the yields on prime funds also rise because of the floating rate nature of the investments. These funds provide a hedge against inflation. The disadvantage is that because these funds invest in corporate debt, prime funds are subject to default risk and could potentially see significant loss should corporate bankruptcies increase in an economic downturn. Prime funds typically have higher expense ratios than money market funds and charge redemption fees when investors pull their money out of the fund prior to meeting a defined holding period. Prime funds are suitable for more sophisticated investors who can perform the necessary due diligence to assess the risks inherent to the fund. Although these funds are a type of cash equivalent, for the average retail investor Prime funds are not a suitable alternative to certificates of deposit or money market funds with respect to risk.

2.7 HOW TO ACQUIRE CERTIFICATES OF DEPOSIT AND SET UP MONEY MARKET FUNDS

[A] Certificates of Deposit

[1] Financial Institutions

Certificates of deposit are offered by virtually all commercial banks, savings and loans, credit unions, and by similar financial institutions. To purchase a CD, the investor simply walks into a bank, deposits their funds, and receives a certificate in exchange. An investor who is already with a customer of a bank could even call the institution, obtain rate quotations, and decide on the maturity date of the certificate and the amount to be purchased. The customer’s account will be charged, the CD will be issued, and the capital will be held in safekeeping by the bank. Sometimes there is no need to actually visit the bank.

Typically, an investor is notified two to three weeks prior to the maturity of the certificate. If no action is taken, the CD will simply roll over into another certificate with a similar maturity, but at the bank’s current rate of interest. The investor also has the option of redeeming the certificate for cash or making an additional investment.

[2] Insurance and Diversification

Not all CDs are insured and there are limits to the amount of insurance on those that are covered. Further, some of the financial institutions are insured by state organizations rather than the federal government. These state insurance arrangements are not as secure as those with federal insurance. This became evident during the failure of savings and loans during the mid-1980s. A prudent and cautious investor will place funds with institutions that do have federal deposit insurance. This supports the need to consider different accounts or financial institutions when deposits are in excess of $250,000.

Investors with larger amounts to invest in CDs generally will purchase multiple certificates rather than a single large certificate or purchase multiple smaller certificates at other institutions (or the same institution under different ownership names). This makes it possible to redeem some of the investment without disturbing the investment entirety, and might also allow for the avoidance of withdrawal penalties on the full amount invested, should funds be needed prior to maturity.

Example. Lara Leimberg wants to invest a million dollar gift she has recently received from her father. She is considering the purchase of certificates using not only her own name, but also the names of her husband and children (jointly with her own, or separately) so that no one certificate exceeds the federal insurance limit of $250,000. (There may be gift tax implications when certificates are purchased in the names of other individuals.) Another alternative would be for Lara to purchase four individual certificates in her own name from four different banks.

[3] Nontraditional CDs

Fixed-rate or traditional CDs are the most common type of CDs, but there have been innovations over the years. Today, some financial institutions offer CD products with nontraditional features. For example, to attract capital a growing number of institutions are offering CDs with little or no penalty for early withdrawals. Others offer unique redemption features in the event the depositor dies. Some have provisions giving the bank the right to call, or accelerate the maturity of the CD, at their discretion. Many banks are offering CDs with variable interest rates linked to a market index (such as the S&P 500 or the Dow Jones Industrial Average). These CDs are referred to as index-linked, market-linked, equity-linked, or structured CDs. However, investors should not confuse these more exotic instruments with more traditional CDs as the risk and return features deviate substantially from their plain vanilla cousins.

[B] Money Market Funds

Almost all major brokerage firms make money market funds available to their customers, which encourages customers to leave funds on deposit at the brokerage when securities are sold or dividends or interest is received into the account.

A money market account is often used to ensure any excess cash balances are fully invested at all times.

Most mutual fund companies include a money market fund in their family of funds. This enables a mutual fund investor to move assets within a family of funds conveniently, quickly, and with minimal cost. Money market mutual funds can be purchased from the fund directly, either in person or by phone or mail. Direct mail, website listings, even newspaper ads often provide the address and phone number of organizations offering money market funds.

2.8 WHAT FEES OR OTHER ACQUISITION COSTS ARE INVOLVED?

There are generally no specific fees or acquisition costs associated with the purchase of CDs or money market funds. However, it is important to remember that a premature redemption fee is assessed by most banks on CDs. Even mutual fund organizations that charge a front-end or back-end load will not generally do so for money market funds. Brokerage firms do not typically charge a sale or redemption fee when funds are added or removed from a money market account. However, there is generally a management fee based on the net asset value of the assets owned by the fund. This fee is generally 0.5 or less. Many money market funds deduct an annual fee of $10, plus or minus an additional fee for low balance accounts (usually below $10,000).

2.9 HOW TO SELECT THE BEST CERTIFICATES OF DEPOSIT AND MONEY MARKET FUNDS

For CDs, an investor should compare the interest rates of multiple financial institutions for a given maturity, prior to any purchase. Higher rates are sometimes available from banks and credit unions in other parts of the country. For this reason, investors—particularly those with larger amounts to invest—generally shop around for the most attractive rates. Information on interest rates offered by out-of-state institutions can be found in Barron’s, The Wall Street Journal, The New York Times, The Investor’s Business Daily, and other major financial newspapers and websites.

For money market funds, an investor should compare the yields being offered by various fund families. Fund returns are generally stated in terms of the average yield paid by the fund during the past seven days or during the past thirty days. When funds are comparable, investors will generally choose the fund with the highest yield. Assuming a stable interest rate environment, when two funds have the exact same yield, investors often favor the fund with the shortest average. For example, assume Fidelity Cash Reserves and T. Rowe Price Prime Reserve Fund are both yielding five percent. If the average maturity of the Fidelity portfolio is thirty days and that of the Rowe Price fund is forty days, investors might prefer the Fidelity fund because of the shorter maturity. Credit rating agencies do evaluate the quality of securities held in a money market fund’s portfolio. Investors might also consider these ratings for comparing the safety of each individual fund.

2.10 WHERE CAN I FIND OUT MORE?

The leading source of information on investments in CDs are the various financial institutions themselves. They provide the most current and accurate information on rates offered, length of maturity, and any early withdrawal penalties.

Financial newspapers and magazines such as The Wall Street Journal (www.wsj.com), New York Times (www.nytimes.com), Barron’s (www.barrons.com), and Investor’s Business Daily (www.investors.com) provide information on money market funds and CDs offered by major financial institutions throughout the country. Local newspapers often carry ads from regional banks and credit unions. These newspapers and magazines also typically show the average maturity of assets held by each money market fund and its current yield.

Various sources on the Internet also provide information on rates available on money market funds and bank CDs. Among these are:

Bankrate (www.bankrate.com)

Bloomberg (www.bloomberg.com )

iMoneyNet, Inc. (www.imoneynet.com )

MSN Money (www.investing.money.msn.com )

Yahoo Finance (http://finance.yahoo.com )

Investors interested in obtaining more information on money market mutual funds can also contact:

Investment Company Institute

1401 H Street, N.W.

Washington, D.C. 20005

(www.ici.org)

Treasury Direct (www.treasurydirect.gov ) – a website operated by the United States Treasury, allows investors to buy and sell Treasury directly over the Internet.

2.11 FREQUENTLY ASKED QUESTIONS

Question – How do money market funds compare with the money market deposit accounts offered by banks, savings, and loans and mutual savings banks?

Answer – The yields available from these investments are generally similar, though banks offer rates that are generally lower than those offered by money market funds. The most important difference between the two investments is that accounts offered by banks are insured by agencies of the federal government. Investors are protected against loss up to a maximum of $250,000 per depositor. Money market funds are not insured by any government agency, but they are generally considered safe because of the high quality of the underlying assets.

Question – What does it mean when a money market mutual fund breaks the buck?

Answer – Money market mutual funds generally have a stable net asset value set of $1.00 and that infers the instrument will never lose money. When a money market mutual fund’s net asset value falls below a dollar, it is said to have broken the buck. Prior to the financial crisis of 2008, there were three instances of money market mutual funds breaking the bank. That was the first and only time after nearly four decades of money market mutual fund activity. That changed when Lehman Brothers filed for bankruptcy in September of 2008 and the Reserve Primary Fund, the country’s oldest money market fund, broke the buck in a big way when it wrote off debt issued by Lehman Brothers resulting in a net asset value of $0.97. This precipitated a run on money market mutual funds until the US Government stepped in to institute a program similar to the FDIC for bank deposits that insured money market funds against breaking the buck. This insurance only covered assets invested in money market mutual funds before September 19, 2008. However, the action was successful in stopping the run on money market mutual funds.

Question – Can a CD be used as collateral for a loan?

Answer – Yes. An investor can pledge a CD as security for a loan. However, banking law (Regulation Q) requires that a bank lending money to customers who use their own CDs as collateral must charge at least 1 percent over the rate of interest being paid on the CD for the loan.

Question – When does the purchaser of a CD receive his interest income?

Answer – The timing of interest payments sometimes varies with different maturity ranges, but it must always be disclosed at purchase. For CDs that mature in less than one year, interest is usually paid at maturity. For CDs with maturities greater than one year, interest might be paid monthly, quarterly, semi-annually, annually, or at maturity, depending on the CD issuer.

---

CHAPTER 3: UNITED STATES GOVERNMENT SECURITIES

3.1 INTRODUCTION

United States government securities are issued by the United States Treasury and various government agencies. United States government securities are used to finance the activities of the federal government. Government securities include direct issues of the Treasury such as bills, notes, and bonds, as well as bonds issued by governmental agencies such as the Government National Mortgage Association (GNMA).

A Treasury bill (T-bill) is a short-term debt security with a maturity of four, thirteen, twenty-six, or fifty-two weeks. Treasury bills are purchased in minimum amounts of $100. The bills are issued at a discount (sold at less than their par or face value) and can be redeemed at face value at maturity (a zero coupon bond). All bills, except the fifty two-week bill, are auctioned every week. The fifty two-week bill is auctioned every fourth week.

A Treasury note is a medium-term debt security, paying interest semi-annually. Notes have a fixed maturity date greater than one year, and maturity can extend for up to ten years from the date of issue. The minimum face value denomination for a Treasury note is $100. Treasury notes are issued with maturities of two, three, five, seven, and ten years.

A Treasury bond (the long bond) is a long-term debt security, which, like Treasury notes, also pays interest on a semi-annual basis. Treasury bonds are issued with a fixed maturity of thirty years. The minimum denomination for a Treasury bond is $100, and interest is paid semi-annually. The price and yield of a Treasury bond are determined by auction. The Treasury auctions bonds in February, May, August, and November. The price of the bond could be greater than, less than, or equal to the face value of the bond, depending on market conditions.

A unique group of securities issued by the United States Treasury are Treasury Inflation-Indexed Securities, sometimes called Treasury Inflation-Protected Securities, or TIPS. The principal value of these bonds is adjusted every six months to reflect changes in inflation as measured by the Consumer Price Index (CPI). The United States Treasury issues five, ten, and thirty-year TIPS. The Treasury auctions five-year TIPS in April, August, and December; ten-year TIPS in January, March, May, July, September, and November; and thirty-year TIPS in February, June, and October.

The US government also issues savings bonds. Savings bonds are issued in minimum denominations of $25. EE bonds earn a fixed rate of return. I bonds earn a fixed rate of return when the bond is purchased. Treasury does its calculation twice a year against the Consumer Price Index. Savings bonds have a very unique feature. The maximum a consumer can purchase in any calendar year is $10,000. Electronic EE and I bonds can be issued in any amount to the penny as long as it is above $25. This means that in theory, you could buy an EE or I bond issued at $50.26.

3.2 WHEN IS THE USE OF GOVERNMENT SECURITIES INDICATED?

When the investor wants a high quality investment that has little risk of default. The United States government has never defaulted on a single obligation since it first found itself in debt in 1790. Some United States government agencies also issue debt with low risk and high quality.

When an investor seeks certainty of income. Because the Treasury can print money or raise taxes to pay interest on its obligations, an investor can be relatively certain that payments will be made timely in the amounts promised. This promise is tested occasionally with political debate on whether to increase the U.S. government debt ceiling. That can create a great deal of angst in the financial markets and has led some investors to conclude that U.S. government debt may indeed have some minimal default risk due to political considerations.

When an investor seeks utility collateral. Due to the very low risk of the loss of capital and the relative certainty of income, United States government securities are readily accepted by lenders as collateral for loans.

When an investor wants a security with the safety of liquidity. Government securities are traded daily in very large volumes by thousands of individuals and institutions. United States government securities are considered highly liquid.

When an investor is either unable or unwilling to accept the investment risk inherent in equity, and corporate fixed income investments.

TIPS are useful for an investor concerned with the loss of purchasing power due to the long-term effects of inflation.

3.3 ADVANTAGES OF GOVERNMENT SECURITIES

United States government securities are virtually free of the risk of default.

The income from government securities is relatively assured.

Government securities are readily accepted by virtually every financial institution as collateral for loans.

The securities of the federal government and its agencies are easily and quickly convertible to cash.

Government issues provide a high degree of security and comfort for risk conscious investors.

Because of the variety of government issues, purchases can be tailored to meet the investor’s goals and objectives.

The interest earned on Treasury securities is not subject to state and local taxation. This can be of a considerable advantage to an investor in a high tax bracket.

TIPS provide long-term inflation protection through the semi-annual adjustment of interest payments and principal values to reflect changes in the Consumer Price Index (CPI).

3.4 DISADVANTAGES OF GOVERNMENT SECURITIES

United States government securities provide a rate of return that is generally lower than other fixed income securities.

Long-term government issues, like any other long-term, or fixed income investment, are subject to a high degree of interest rate risk. Therefore, the prices of United States government and agency bonds fluctuate substantially with changes in interest rates.

With the exception of TIPS, the purchasing power of cash invested in United States Government securities may erode over time by the effects of inflation. This exposure can be particularly acute if the instruments are long term.

3.5 TAX IMPLICATIONS OF GOVERNMENT SECURITIES

Interest income from T-bills, Treasury notes, and Treasury bonds are subject to federal income tax. This income is taxable at ordinary income rates.

Interest from United States government securities is entirely exempt from all state and local taxes.

Interest from a Treasury bill is not reportable until the year that the T-bill matures. Therefore, if an investor purchased a thirteen-week T-bill in November and the bill matures in February, the interest earned on the bill would be declared on the year of the February payment’s federal income tax return.

Should an investor sell a T-bill on the open market prior to its maturity, they must report as ordinary income the difference between the price paid and the selling price. If the bill is sold for more than what was paid, the gain will be ordinary income. If the bill is sold for less than what was paid, the loss is treated as a capital loss.

A Treasury note or bond is subject to capital gains treatment. If a note or bond is sold before maturity on the open market, any gain or loss is treated as a capital gain or a capital loss. (Original issue discount or market discount securities must also treat the gain as ordinary income.)

In any year where the principal value of a TIPS bond increases due to the inflation adjustment, that gain is considered reportable income for the year even though the investor won’t receive the inflation-adjusted principal until the security matures.

3.6 ALTERNATIVES TO GOVERNMENT SECURITIES

Short-term certificates of deposit issued by banks and savings institutions are comparable to U.S. Treasury bills. The interest rate paid on CDs is usually the same as, or are slightly higher than the current T-bill rate. Most institutions will pay a small premium over the T-bill rate in order to attract investors away from government securities, but the premium is usually minimally higher.

Longer-term certificates of deposit, also issued by banks, and other savings institutions, are generally competitive with Treasury notes and bonds, as are the securities of other government agencies.

High quality corporate bonds (Standard & Poor’s ratings of AA or AAA as an example) are considered an alternative to long-term government securities. However, these corporate issues involve more risk, and as a result will generally provide considerably higher rates of return.

3.7 HOW TO OBTAIN GOVERNMENT SECURITIES

T-bills are offered according to a regular schedule. Four, thirteen, and twenty-six week bills are offered every week by the Treasury. The fifty-two week bill is offered every fourth week. Thirteen and twenty-six week bills are offered on Monday, and four-week bills are offered on Tuesday. You can find the date of the next scheduled offering of both notes and bonds at www.treasurydirect.gov .

Federal government securities, including TIPS, can be purchased: (1) by using the Treasury Direct system on the internet; (2) from a commercial bank; or (3) through a brokerage firm.

Individual investors can purchase United States Treasury securities directly through the Treasury Direct system (www.treasurydirect.gov ). To open a Treasury Direct account, an individual must first create an account online. Once the Treasury Direct account is opened, the individual can purchase new issues of bills, notes, and bonds in amounts as small as $100. The amount of the purchase will be automatically deducted from the investor’s checking account on the day the securities are issued. Similarly, when the security matures, the par value will be deposited to the same checking account. In addition to the convenience of the Internet, purchases made through Treasury Direct are free of commissions or other fees. Investors can purchase T-bills in two ways: (1) with a noncompetitive bid, where the investor agrees to accept the discount rate determined at auction, or (2) with a competitive bid, where the investor determines the discount rate they are willing to accept. With a competitive bid, your bid may be: (1) accepted in the full amount when the rate specified is less than the discount rate set by the auction, (2) accepted in less than the full amount when the bid is equal to the discount rate; or (3) rejected if the rate specified is higher than the discount rate set at the auction.

Many individual investors prefer the convenience of purchasing United States government securities from their local bank or brokerage firm. To do this, they simply call their banker or broker, or login to their brokerage account and indicate the amount they want to invest and the security they want to purchase. The bank will then send the security to the investor, while a broker may offer to hold the security in the customer’s account.

3.8 WHAT FEES OR OTHER ACQUISITION COSTS ARE INVOLVED?

When an investor purchases a security directly from the United States Treasury, there are no charges or commissions.

Making a purchase through a bank or broker will typically be more expensive. Banks may charge a commission as well as a premium on purchases under $100,000. Because these charges vary considerably, a prudent investor will compare the fees and premiums charged by a number of financial institutions.

Beyond commissions, an investor’s cost in purchasing government securities from a bank or broker will always be different from the cost of a direct purchase from the federal government. The bank or broker will either purchase the securities on the open market or sell the investor securities from their own inventory. This means an investor must pay the asked market price, which will generally be higher or lower than the price that the note or bond was originally issued.

Another consideration for an investor purchasing an already issued U.S. Government security in the secondary market is the amount of interest accrued on the note or bond since the last interest payment date, but not yet paid. The investor is entitled only to interest earned beginning on the date of purchase. Therefore, an investor must pay the seller of the security the amount of interest accrued since the last payment date in addition to the price of the note or bond itself. On the payment date following purchase, the investor will receive the full interest for the period.

3.9 HOW TO SELECT THE BEST TYPE OF GOVERNMENT SECURITIES?

Unlike other investments, all government securities with similar maturities will carry the same risk and reward characteristics. Therefore, selecting the best of its type will depend on the investor’s goals and objectives. Planners should focus on the investor’s needs for liquidity, income, and tax deferral in selecting T-bills, notes, or bonds.

Example. Anne Lewis wants to have a high degree of liquidity in her investment because she feels interest rates are likely to increase in the months ahead. Anne would not purchase long-term notes or bonds since they will decline in value as rates increase. Anne would instead invest in short-term issues such as T-bills that mature relatively quickly and that will allow her to reinvest at the higher interest rate.

3.10 WHERE CAN I FIND OUT MORE?

Financial publications such as the Wall Street Journal (www.wsj.com) and Barron’s (www.barrons.com) regularly quote prices for bills, notes, and bonds issued by the federal government. Quotes on government securities are also available on websites such as Bloomberg (www.bloomberg.com) and Yahoo (www.finance.yahoo.com).

Banks and brokerage firms also provide investors with information on available United States Government investments and current prices.

Investors may also contact the Treasury itself for information. Information on email inquiries are posted on www.treasurydirect.gov .

Information on government securities may also be obtained through electronic data networks such as Dow Jones Newswires (www.dowjones.com).

3.11 FREQUENTLY ASKED QUESTIONS

Question – How is interest paid on United States Treasury bills?

Answer – Treasury bills do not pay interest the same way as other securities. Bills are sold at a discount, which means they are offered at a price below their face value or redemption value. The difference between the offering price and the maturity value represents the interest that will be earned by investors.

Example. A Treasury bill may be offered at a price of $996 with the face value of $1,000 to be paid in thirteen weeks, or ninety-one days. This represents a rate of return to the investor of 1.62 percent:

Question – What is the difference between a Treasury note and a Treasury bond?

Answer – The difference is in the length of time until maturity. Notes have maturities of one to ten years. Bonds have maturities of ten years or more.

Question – Are there mutual funds that specialize in Treasury securities?

Answer – Yes, a mutual