The University invests directly in mortgage backed securities including collaterized mortgage obligations, interest only strips and mortgage pass-through securities. These securities are purchased to modify exposure to certain risks, to enhance yields on investments or to effect changes in portfolios without significantly affecting liquidity. Since these securities are based on cash flows from the underlying mortgages, they are sensitive to prepayments by mortgagees and to interest rate changes.

Some of the University's mutual fund managers may invest in a variety of derivatives including futures, options, forward foreign currency contracts, short sales and convertible bond hedging. Any derivatives may carry credit risk, market risk and interest rate risk. Certain of these securities are used to reduce market risk, currency exchange risk and interest rate risk.

The University's investments are categorized to give an indication of the level of risk assumed at year end. Category 1 includes investments that are insured or registered, or securities held by the University or its agent in the University's name. Category 2 includes investments that are uninsured and unregistered for which the securities are held by the bank's trust department or agent in the University's name. Category 3 includes investments that are uninsured and unregistered for which the securities are held by the bank, or its trust department or agent but not in the University's name. The University did not have any Category 3 investments at June 30, 1997.
 

The major portion of endowment fund assets is pooled for investment purposes. Each individual fund subscribes to or disposes of units on the basis of the value per unit at market value at the beginning of the month within which the transaction takes place. Income is distributed on a per unit basis. Of the total units (each having a market value of $38,446), 2304.4152 units were owned by endowment funds and 980.6594 units by quasi endowment funds at June 30, 1997 ($34,444, 2217.7929 and 974.0161 respectively, at June 30, 1996).

The table below summarizes changes in relationships between cost and market values (dollars in thousands except per unit amounts) of the pool: