a6orangecounty - Autumn 2011 Managerial Finance Prof...

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Autumn 2011 Managerial Finance Prof. Francisco Pérez-González Orange County’s Investment Pool Read and prepare: Orange County (in the course reader). Big picture question: Was Mr. Citron’s strategy reasonable for Orange County and other participating municipalities? Questions: 1. Assuming no change in interest rates, what return would Orange County’s investment pool earn as a result of Citron’s strategy? 2. What inherent risk was the investment pool exposed to? 3. What happened to interest rates and the yield curve in 1994? What impact would this have on the investment pool? How can you explain the pool’s sudden loss of $1.6 billion while investing in “safe” bonds? Hints: 1. Compare the yield curve in 1993 to the yield curve in 1994: www.smartmoney.com/investing/bonds/the-living-yield-curve-7923/ or google: “living yield curve” and compare the shape of the 1993 to the
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