[Federal Register Volume 62, Number 235 (Monday, December 8, 1997)]
[Proposed Rules]
[Pages 64528-64532]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-31953]



[[Page 64528]]

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DEPARTMENT OF THE TREASURY

Fiscal Service

31 CFR Part 356


Sale and Issue of Marketable Book-Entry Treasury Bills, Notes, 
and Bonds (Department of the Treasury Circular, Public Debt Series No. 
1-93)

AGENCY: Bureau of the Public Debt, Fiscal Service, Department of the 
Treasury.

ACTION: Proposed rule.

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SUMMARY: The Department of the Treasury (``Treasury'' or 
``Department'') is proposing for comment an amendment to 31 CFR Part 
356 (Uniform Offering Circular for the Sale and Issue of Marketable 
Book-Entry Treasury Bills, Notes, and Bonds). This proposed amendment 
includes changes necessary to make fungible stripped interest 
components for Treasury inflation-indexed securities, which the 
Department began issuing in January 1997. In addition, the proposed 
amendment makes certain technical clarifications and conforming 
changes.

DATES: Comments must be received on or before February 6, 1998.

ADDRESSES: Written comments should be sent to: Government Securities 
Regulations Staff, Bureau of the Public Debt, 999 E Street N.W., Room 
515, Washington, D.C. 20239-0001. Comments may also be sent via the 
Internet to the Government Securities Regulations Staff at 
<a href="/cdn-cgi/l/email-protection#13747c65607670617674537163773d67617672603d747c65"><span class="__cf_email__" data-cfemail="42252d34312721302725022032266c36302723316c252d34">[email protected]</span></a>. When sending comments via the Internet, please 
use an ASCII file format and provide your full name and mailing 
address. Comments received will be available for public inspection and 
downloading from the Internet and for public inspection and copying at 
the Treasury Department Library, Room 5030, Main Treasury Building, 
1500 Pennsylvania Avenue, N.W., Washington, D.C. 20220.
    This proposed amendment has also been made available for 
downloading from Public Debt's web site at the following address: 
www.publicdebt.treas.gov.

FOR FURTHER INFORMATION CONTACT: Ken Papaj (Director), Chuck Andreatta 
or Kurt Eidemiller (Government Securities Specialists), Department of 
the Treasury, Bureau of the Public Debt, Government Securities 
Regulations Staff (202) 219-3632.

SUPPLEMENTARY INFORMATION:

I. Background

    31 CFR Part 356, also referred to as the uniform offering circular, 
sets out the terms and conditions for the sale and issuance by the 
Department of the Treasury to the public of marketable Treasury bills, 
notes, and bonds. The uniform offering circular, in conjunction with 
offering announcements, represents a comprehensive statement of those 
terms and conditions.<SUP>1</SUP>
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    \1\ The uniform offering circular was published as a final rule 
on January 5, 1993 (58 FR 412). The circular, as amended, is 
codified at 31 CFR Part 356.
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    In January 1997, the Department began issuing a new type of 
marketable security, referred to as a Treasury inflation-indexed 
security,<SUP>2</SUP> whose principal value is adjusted for inflation 
as measured by the United States Government.<SUP>3</SUP> The Department 
believes the issuance of these new securities will reduce interest 
costs to the Treasury over the long term and broaden the types of debt 
instruments available to investors in U.S. financial markets.
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    \2\ To date the Department has issued only inflation-indexed 
notes. 31 CFR Part 356 also accommodates offerings of inflation-
indexed bonds, which the Department intends to begin issuing in 
1998.
    \3\ 62 FR 846 (January 6, 1997).
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A. Inflation-Indexed STRIPS

    Inflation-indexed securities are eligible for the STRIPS (Separate 
Trading of Registered Interest and Principal of Securities) program 
immediately upon their issuance by the Treasury. STRIPS is the 
Department's program under which eligible securities are authorized to 
be separated into principal and interest components (interest 
components are also referred to as ``TINTS''). Such components are 
maintained in book-entry accounts, and transferred separately in the 
Treasury/Reserve Automated Debt Entry System (``TRADES'' or the 
commercial book-entry system). Unlike TINTS from fixed-principal 
securities, interest components stripped from an inflation-indexed 
security are currently not fungible (i.e., they are not 
interchangeable) with interest components stripped from a different 
inflation-indexed security, even if the components have the same 
maturity (payment) date.<SUP>4</SUP>
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    \4\ See 31 CFR 356.31(f).
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    Making such stripped interest components fungible (i.e., 
interchangeable and having the same CUSIP number) is a more complicated 
process than it is for fixed-principal interest components because of 
the way in which inflation-indexed securities adjust for inflation. 
Interest payments and the inflation-adjusted principal amount paid at 
maturity are calculated based on the amount of inflation, as measured 
by changes in the CPI,<SUP>5</SUP> that has occurred since the original 
issue date of the security.
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    \5\ CPI refers to the non-seasonally adjusted U.S. City Average 
All Items Consumer Price Index for All Urban Consumers published 
monthly by the Bureau of Labor Statistics of the U.S. Department of 
Labor.
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    Although the CPI is announced monthly, a unique ``reference CPI'' 
can be calculated for any particular date using an interpolative 
process described in Appendix B of the uniform offering 
circular.<SUP>6</SUP> Each inflation-indexed security has a unique 
reference CPI value applicable to the security's original issue 
date.<SUP>7</SUP> This is the starting point for measuring inflation 
for the period the security is outstanding. To calculate interest 
payments or the principal value at maturity of an inflation-indexed 
security, the par amount is adjusted for inflation by application of an 
``index ratio,'' which is the ratio of the reference CPI applicable to 
the interest payment or maturity date divided by the reference CPI 
applicable to the original issue date. Stripped principal and interest 
components with the same maturity date that are created from securities 
with different issue dates have different index ratios at maturity. 
This makes providing for fungibility of the interest components 
somewhat complicated.
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    \6\ See 31 CFR Part 356, Appendix B, Section I, Paragraph B, for 
a detailed explanation of the indexing process and application of 
the index ratio and reference CPI.
    \7\ If the security's dated date is different from the original 
issue date, then the reference CPI for the dated date is used. See 
31 CFR 356.2 for the definition of dated date. This preamble 
discussion assumes that the original issue date and the dated date 
are the same and therefore uses only the term original issue date.
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    Due to this complexity, inflation-indexed interest components were 
not made fungible when the securities were first offered in January 
1997. As a result, while the rules currently permit inflation-indexed 
securities to be stripped into separate principal and interest 
components, interest components from the outstanding 5-year and 10-year 
inflation-indexed notes are not fungible even though some components 
would have the same maturity (payment) date. In the preamble to the 
final rule amendments to accommodate inflation-indexed securities, the 
Department stated that it would ``continue to work on making interest 
components fungible in a manner that is operationally 
feasible.''<SUP>8</SUP> The Department recognizes that making stripped 
inflation-indexed interest components fungible is important to

[[Page 64529]]

developing a liquid market for these components.
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    \8\ 62 FR 846, 848 (January 6, 1997).
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    Over the last several months, the Department has worked with market 
participants to develop a methodology that will enable interest 
components stripped from different inflation-indexed securities to be 
fungible. The Department requests comments from market participants on 
the following proposed methodology and any related aspects of this 
proposal. Specifically, comments are requested on any operational 
issues, including the time needed to make any necessary automated 
system changes, and the extent to which making inflation-indexed TINTS 
fungible would help in the continued development of a liquid market for 
inflation-indexed securities.

B. Proposed Methodology for Fungible Inflation-Indexed STRIPS

    To make TINTS from different inflation-indexed securities fungible, 
the TINTS would be converted to a common reference CPI value of 100. 
This would be accomplished by calculating an ``adjusted value'' (see 
sections 356.2 and 356.31(c) of the proposed rule). The adjusted value 
of each TINT would be calculated by multiplying the par amount of the 
inflation-indexed security to be stripped by the security's semiannual 
interest rate, and then multiplying this amount by the ratio of 100 
divided by the reference CPI for the security's original issue date. 
For example, an inflation-indexed security with a par amount of $1 
million, an interest rate of 3\1/2\%, and an issue-date reference CPI 
of 162.00000 would have an adjustment factor for each TINT of $1 
million  x  (0.035)/2  x  (100/162), or $10,802.47. Inflation-indexed 
TINTS would be maintained in accounts and transferred at their 
``adjusted value.'' This is in contrast to stripped principal 
components, which would be maintained and transferred at their par 
amount.
    All inflation-indexed TINTS with the same maturity date would have 
the same CUSIP number, regardless of the underlying inflation-indexed 
security from which the interest components were stripped. Such TINTS 
would be considered to be the same security and would therefore be 
fungible. Fungibility would apply to TINTS only; stripped principal 
components would not be fungible. TINTS from inflation-indexed 
securities would not be fungible with any interest components stripped 
from fixed-principal securities.
    By converting to adjusted values, all inflation-indexed TINTS 
having the same maturity date would become fungible. They would be 
bought and sold on the basis of their adjusted values, regardless of 
the underlying security from which they were stripped. Similarly, for 
purposes of reconstituting an inflation-indexed security from its 
separate stripped unmatured interest and principal components, an 
investor could obtain any needed TINTS at the adjusted value required 
for the particular inflation-indexed security to be reconstituted. For 
example, to reconstitute $1 million of an inflation-indexed security 
with an interest rate of 3\1/2\% and an issue-date reference CPI of 
162.00000, a holder would submit to the Federal Reserve Bank of New 
York the principal component and all unmatured TINTS, each TINT having 
an adjusted value of $1 million  x  (0.035)/2  x  (100/162), or 
$10,802.47.
    When a TINT matures, its payment amount would be calculated by 
multiplying the adjusted value by the reference CPI for the maturity 
date, divided by 100. For example, for an adjusted value of $10,802.47 
and a maturity-date reference CPI of 167.00000, the payment amount 
would be $10,802.47  x  (167/100), or $18,040.12. The end result is 
that a holder of an inflation-indexed TINT stripped from a security of 
a given par amount would receive, except for a possible slight 
difference due to rounding procedures, a payment amount at maturity 
that is the same as the interest payment received by a holder of a 
fully-constituted security of the same par amount.<SUP>9</SUP>
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    \9\ In this example, a holder of $1 million of the fully-
constituted security would receive an interest payment of 
$18,040.05.
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C. Payment Differences

    The possible difference in payment amount between a stripped 
interest component and an interest payment from a fully-constituted 
security results primarily from rounding the index ratio. The size of 
the differences is a function of both the interest rate of the fully-
constituted security and the level of the CPI on the payment date. 
These differences are quite small. For example, for an inflation-
indexed security with an interest (coupon) rate of 4% or less 
<SUP>10</SUP> and a reference CPI of 200 or less on the payment date, 
the maximum payment difference per $1 million of par is $0.11 (higher 
or lower). Over a range of securities offerings, these payment 
differences generally would be revenue neutral--they would benefit 
neither the Treasury nor STRIPS investors. Further, revising Treasury's 
rounding conventions would require market participants and the 
Department to modify their automated systems to accommodate this 
change. Since the payment differences are de minimis and revenue 
neutral, the costs of such systems changes would outweigh their 
benefits. Therefore, the Department has determined not to change its 
current rounding conventions to eliminate these differences.
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    \10\ To date, the interest (coupon) rates on the two issues of 
Treasury inflation-indexed notes have been 3\3/8\% and 3\5/8\%.
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D. Minimum and Multiple Amounts for Stripping

    In order to make the calculation of adjusted values and payment 
amounts for inflation-indexed TINTS as precise as possible, adjusted 
values would be calculated--and transferred and maintained--to the 
penny (e.g., $10,802.47). Therefore, in effect there would be no 
required multiple amounts for inflation-indexed TINTS. This is in 
contrast to fixed-principal TINTS, which must be transferred and 
maintained in multiple amounts of $1,000. Some market participants that 
plan to participate in the inflation-indexed STRIPS market might need 
to modify their automated systems to accommodate holding Treasury 
securities to the penny (i.e., to two decimal places).
    The minimum par amount of a fully-constituted inflation-indexed 
security that could be submitted to the Federal Reserve Bank of New 
York for stripping would be $1,000, with any larger amounts in 
multiples of $1,000. Except for the requirement that they be expressed 
to the penny, there would be no required minimum adjusted value for the 
resulting TINTS. This is in contrast to minimum and multiple stripping 
requirements for fixed-principal securities, under which, for any given 
interest rate, the fully-constituted security must be submitted in a 
specific minimum and multiple par amount in order to produce TINTS that 
are themselves in minimum and multiple amounts of $1,000.<SUP>11</SUP>
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    \11\ 31 CFR Part 356, Exhibit C includes a table that provides, 
for each interest rate from \1/8\% to 20%, the corresponding minimum 
par amount of the fully-constituted security required to produce 
TINTS that are in multiples of $1,000.
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    No changes are being proposed at this time to the current STRIPS 
program for fixed-principal securities. However, the Department will 
consider at a later date the desirability of making changes to the 
minimum and multiple requirements for fixed-principal TINTS similar to 
the proposed requirements for inflation-indexed TINTS, i.e., 
discontinuing the $1,000 minimum-to-hold and multiple requirement, and 
permitting fixed-principal TINTS to be held in amounts to the penny.

[[Page 64530]]

E. Index Contingencies

    The CPI is expressed in relative terms in relation to a particular 
time base reference period for which the level is set at 100. The 
current CPI reference period is 1982-84. The Department understands 
that, sometime during the next two years, the Bureau of Labor 
Statistics (BLS) plans to rebase the CPI to a 1993-95 base period. Once 
this new base period goes into effect, subsequent issuances of Treasury 
inflation-indexed securities would be issued using the new base period. 
In other words, the reference CPI of the original issue date will 
reflect the new reference period and thus will generally be a lower 
number than the issue-date reference CPIs of those inflation-indexed 
securities issued prior to the effective date of the new base reference 
period.
    When this new reference period goes into effect, Treasury 
understands that BLS will continue to publish CPI figures for the 1982-
84 base period as well as publish figures for the new 1993-95 base 
period. Interest payments, and principal payments at maturity, for 
unstripped inflation-indexed securities issued while the 1982-84 base 
period was in effect will continue to be calculated using reference CPI 
numbers derived from this base period.
    Allowing inflation-indexed TINTS issued during one base reference 
period to be fungible with those issued during other base reference 
periods could enhance their liquidity. Fungibility could be achieved 
through, for example, the use of a conversion factor that would, in 
effect, transform the adjusted values of all inflation-indexed TINTS 
with 1982-84 base-period reference CPIs to values based on the 1993-95 
base period. However, such a process would likely result in additional 
payment differences of a similar nature and magnitude as those 
described previously. As was the case with those payment differences, 
payment differences caused by the transformation of adjusted values to 
a new base period would generally be revenue neutral over a range of 
securities offerings. Since, for each rebasing, there would be a one-
time conversion for those outstanding inflation-indexed securities, 
Treasury would provide this conversion factor to market participants so 
that they could modify their systems accordingly. The CPI has been 
rebased approximately every 10 years so, during the maturity period of 
a 30-year inflation-indexed bond, rebasing could occur two or three 
times. The Department solicits comment from market participants on 
whether the benefits of increased supply, and thus additional 
liquidity, of specific fungible inflation-indexed TINTS would justify 
the cost and inconvenience of having additional small payment 
discrepancies, possible automated system changes to accommodate a 
conversion factor, and increased complexity of the rules.
    A different index contingency would occur if the Treasury were to 
replace the CPI with a different measure of inflation for the purpose 
of indexing securities because the CPI was discontinued or 
``fundamentally'' altered as described in the preamble to the final 
rule amendment to accommodate inflation-indexed 
securities.<SUP>12</SUP> The Department is not aware of any plans to 
discontinue or fundamentally change the CPI, but it is important for 
market participants to understand the effect that such an event would 
have on outstanding inflation-indexed securities. The Department has 
determined that TINTS stripped from inflation-indexed securities issued 
under different indices would not be fungible.
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    \12\ 62 FR 846, 849 (January 6, 1997).
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F. Fungibility of TINTS Created Prior to Effective Date of Amendment

    As of October 31, 1997, none of the currently outstanding 
inflation-indexed securities has been stripped. If these securities 
were to be stripped prior to the effective date of a final rule making 
inflation-indexed TINTS fungible, the resulting TINTS would be 
converted to fungible TINTS since it is the Department's goal, where 
possible, to make all TINTS from inflation-indexed securities fungible. 
Specifically, if a market participant decides to strip an inflation-
indexed security prior to the effective date for making STRIPS 
fungible, Treasury will convert any outstanding inflation-indexed TINTS 
by retiring them and issuing new fungible inflation-indexed TINTS. If 
necessary, Treasury will provide public notice informing participants 
of the effective conversion date. Also, detailed instructions regarding 
the conversion to fungible STRIPS will be provided.

G. Taxation

    There are no new tax issues related to making inflation-indexed 
TINTS fungible. The tax treatment as noted in current 31 CFR 356.32 
applies.

II. Section-by-Section Analysis

    This proposed amendment, when finalized, would include the 
necessary revisions to make fungible the stripped interest components 
of marketable Treasury inflation-indexed securities. This rule would 
amend sections 356.2 and 356.31 and add a new section IV to Appendix B 
of the uniform offering circular.

A. Section 356.2--Definitions

    The term adjusted value has been added to the listing of 
definitions in Sec. 356.2. This term refers specifically to interest 
components stripped from inflation-indexed securities.

B. Section 356.31--STRIPS

    Changes have been made to Sec. 356.31 to reflect the STRIPS program 
more completely. The section has been reorganized to distinguish more 
clearly the features of fixed-principal STRIPS from inflation-indexed 
STRIPS. Most of the significant modifications to this section have been 
made in paragraph (c), which only discusses inflation-indexed 
securities.
    Specifically, new paragraph (c)(1) provides that the minimum and 
multiple par amount of an inflation-indexed security that may be 
stripped would be $1,000. New paragraph (c)(2), except for a revised 
title, is essentially the same as current paragraph (e), since the 
treatment of principal components stripped from inflation-indexed 
securities does not change under this proposal. New paragraph (c)(3) 
describes the calculation of the adjusted value for interest 
components; clarifies that interest components stripped from inflation-
indexed securities would be maintained and transferred at their 
adjusted value; describes the fungibility of these components; and 
explains how the payment amount would be calculated from the adjusted 
value. New paragraph (d), which discusses reconstitution, is 
essentially the same as current paragraph (g) except that the sentence 
stating that interest components stripped from inflation-indexed 
securities are not interchangeable has been deleted. New paragraph (e) 
is the same as current paragraph (h).

C. Appendix B to Part 356

    A new Section IV has been added to Appendix B to provide the 
formulas and an example for calculating the adjusted value and the 
payment amount for inflation-indexed TINTS. The previous Section IV has 
been renumbered as Section V.

D. Exhibit C to Part 356

    The title of Exhibit C has been revised to indicate that the 
exhibit, which contains minimum par amounts of securities for stripping 
at various interest rates, applies only to fixed-principal STRIPS.

[[Page 64531]]

III. Procedural Requirements

    This proposed rule does not meet the criteria for a ``significant 
regulatory action'' pursuant to Executive Order 12866. Although this 
rule is being issued in proposed form to secure the benefit of public 
comment, the notice and public procedures requirements of the 
Administrative Procedure Act are inapplicable, pursuant to 5 U.S.C. 
553(a)(2). Since no notice of proposed rulemaking is required, the 
provisions of the Regulatory Flexibility Act (5 U.S.C. 601, et seq.) do 
not apply.
    There is no new collection of information contained in this 
proposed rule and, therefore, the Paperwork Reduction Act does not 
apply. The collections of information in 31 CFR Part 356 have been 
previously approved by the Office of Management and Budget under 
section 3507(d) of the Paperwork Reduction Act of 1995 (44 U.S.C. 
Chapter 35) under control number 1535-0112. Under this Act, an agency 
may not conduct or sponsor, and a person is not required to respond to, 
a collection of information unless it displays a valid OMB control 
number.

List of Subjects in 31 CFR Part 356

    Bonds, Federal Reserve System, Government securities, Securities.

    Dated: December 1, 1997.
Gerald Murphy,
Fiscal Assistant Secretary.

    For the reasons set forth in the preamble, 31 CFR Chapter II, 
Subchapter B, Part 356, is proposed to be amended as follows:

PART 356--SALE AND ISSUE OF MARKETABLE BOOK-ENTRY TREASURY BILLS, 
NOTES, AND BONDS (DEPARTMENT OF THE TREASURY CIRCULAR, PUBLIC DEBT 
SERIES NO. 1-93)

    1. The authority citation for part 356 continues to read as 
follows:

    Authority: 5 U.S.C. 301; 31 U.S.C. 3102, et seq.; 12 U.S.C. 391.

    2. Section 356.2 is amended by adding in alphabetical order the 
definition of ``Adjusted value'' to read as follows:


Sec. 356.2  Definitions.

* * * * *
    Adjusted value means, for an interest component stripped from an 
inflation-indexed security, an amount derived by multiplying the 
semiannual interest rate by the par amount and then multiplying this 
value by 100 divided by the Reference CPI of the original issue date 
(or dated date, when the dated date is different from the original 
issue date). (See Appendix B, Section IV, to this part for an example 
of how to calculate the adjusted value for interest components stripped 
from an inflation-indexed security.)
* * * * *
    3. Section 356.31 is revised to read as follows:


Sec. 356.31  STRIPS.

    (a) General. A note or bond may be designated in the offering 
announcement as eligible for the STRIPS program. At the option of the 
holder, and generally at any time from its issue date until its call or 
maturity, any such security may be ``stripped,'' i.e., divided into 
separate principal and interest components. A short or long first 
interest payment and all interest payments within a callable period are 
not eligible to be stripped from the principal component. The CUSIP 
numbers and payment dates for the principal and interest components are 
provided in the offering announcement if not previously announced.
    (b) Treasury fixed-principal securities--(1) Minimum par amounts 
required for STRIPS. For a fixed-principal security to be stripped into 
the components described above, the par amount of the security must be 
in an amount that, based on its interest rate, will produce a 
semiannual interest payment in a multiple of $1,000. Exhibit C to this 
part provides the minimum par amounts required to strip a fixed-
principal security at various interest rates, as well as the 
corresponding interest payments. Amounts greater than the minimum par 
amount must be in multiples of that amount. The minimum par amount 
required to strip a particular security will be provided in the press 
release announcing the auction results.
    (2) Principal components. Principal components stripped from fixed-
principal securities are maintained in accounts, and transferred, at 
their par amount. The principal components have a CUSIP number that is 
different from the CUSIP number of the fully-constituted (unstripped) 
security.
    (3) Interest components. Interest components stripped from fixed-
principal securities are maintained in accounts, and transferred, at 
their original payment value, which is derived by applying the 
semiannual interest rate to the par amount. When an interest component 
is created, the interest payment date becomes the maturity date for the 
component. All such components with the same maturity date have the 
same CUSIP number, regardless of the underlying security from which the 
interest payments were stripped. All interest components have CUSIP 
numbers that are different from the CUSIP number of any fully-
constituted security and any principal component.
    (c) Treasury inflation-indexed securities. (1) Minimum par amounts 
required for STRIPS. The minimum par amount of an inflation-indexed 
security that may be stripped into the components described in 
paragraph (a) of this section is $1,000. Any par amount to be stripped 
above $1,000 must be in a multiple of $1,000.
    (2) Principal components. Principal components stripped from 
inflation-indexed securities are maintained in accounts, and 
transferred, at their par amount. At maturity, the holder will receive 
the inflation-adjusted principal value or the par amount, whichever is 
greater. (See Sec. 356.30.) The principal components have a CUSIP 
number that is different from the CUSIP number of the fully-constituted 
(unstripped) security.
    (3) Interest components. Interest components stripped from 
inflation-indexed securities are maintained in accounts, and 
transferred, at their adjusted value, which is derived by multiplying 
the semiannual interest rate by the par amount and then multiplying 
this value by 100 divided by the Reference CPI of the original issue 
date (or dated date, when the dated date is different from the original 
issue date). See Appendix B, Section IV, to this part for an example of 
how to calculate an adjusted value. When an interest component is 
created, the interest payment date becomes the maturity date for the 
component. All such components with the same maturity date have the 
same CUSIP number, regardless of the underlying security from which the 
interest payments were stripped. All interest components have CUSIP 
numbers that are different from the CUSIP number of any fully-
constituted security and any principal component. At maturity, the 
payment to the holder will be derived by multiplying the adjusted value 
of the interest component by the Reference CPI of the maturity date, 
divided by 100. See Appendix B, Section IV, to this part for an example 
of how to calculate an actual payment amount from an adjusted value.
    (d) Reconstituting a security. Stripped interest and principal 
components may be reconstituted, i.e., restored to their fully-
constituted form. A principal component and all related unmatured 
interest components, in the appropriate minimum or multiple amounts or 
adjusted values, must be submitted together for reconstitution. 
Interest components stripped from inflation-

[[Page 64532]]

 indexed securities are different from interest components stripped 
from fixed-principal securities and, accordingly, are not 
interchangeable for reconstitution purposes.
    (e) Applicable regulations. Unless otherwise provided in this part, 
notes and bonds stripped into their STRIPS components are governed by 
subparts A, B, and D of part 357 of this chapter.
    4. Appendix B to part 356 is amended by revising the list of 
section headings at the beginning of the appendix to read as follows:

Appendix B to Part 356--Formulas and Tables

I. Computation of Interest on Treasury Bonds and Notes.
II. Formulas for Conversion of Fixed-Principal Security Yields to 
Equivalent Prices.
III. Formulas for Conversion of Inflation-Indexed Security Yields to 
Equivalent Prices.
IV. Computation of Adjusted Values and Payment Amounts for Stripped 
Inflation-Indexed Interest Components.
V. Computation of Purchase Price, Discount Rate, and Investment Rate 
(Coupon-Equivalent Yield) for Treasury Bills.
* * * * *
    5. Appendix B to Part 356 is amended by redesignating Section IV as 
Section V and adding a new Section IV to read as follows:
* * * * *

IV. Computation of Adjusted Values and Payment Amounts for Stripped 
Inflation-Indexed Interest Components

    Note: Valuing an interest component stripped from an inflation-
indexed security at its adjusted value enables this interest 
component to be interchangeable (fungible) with other interest 
components that have the same maturity date, regardless of the 
underlying inflation-indexed security from which the interest 
components were stripped. The adjusted value provides for 
fungibility of these various interest components when buying, 
selling, or transferring them, or when reconstituting an inflation-
indexed security.

Definitions

C=the regular annual interest rate, payable semiannually, e.g., 
3.625% (the decimal equivalent of a 3-\5/8\% interest rate)
Par=par amount of the security to be stripped
Ref CPI<INF>Issue Date</INF>=reference CPI for the original issue 
date (or dated date, when the dated date is different from the 
original issue date) of the underlying (unstripped) security
Ref CPI<INF>Date</INF>=reference CPI for the maturity date of the 
interest component
AV=adjusted value of the interest component
PA=payment amount at maturity by Treasury

Formulas

AV=Par (C/2)(100/Ref CPI<INF>Issue Date</INF>) (rounded to 2 
decimals with no intermediate rounding)
PA=AV (Ref CPI<INF>Date</INF>/100) (rounded to 2 decimals with no 
intermediate rounding)

    Example. A 10-year inflation-indexed note paying 3\1/2\% 
interest is issued on January 15, 1999, with the second interest 
payment on January 15, 2000. The Ref CPI on January 15, 1999 (Ref 
CPI<INF>Issue Date</INF>) is 174.62783, and the Ref CPI on January 
15, 2000 (Ref CPI<INF>Date</INF>) is 179.86159. Calculate the 
adjusted value and the payment amount at maturity of the interest 
component.

Definitions

C=3.50%
Par=$1,000,000
Ref CPI<INF>Issue Date</INF>=174.62783
Ref CPI<INF>Date</INF>=179.86159

Resolution

    For a par amount of $1 million, the adjusted value of each 
stripped interest component is $1,000,000 (.035/2)(100/174.62783), 
or $10,021.31 (no intermediate rounding).
    For an interest component maturing on January 15, 2000, the 
payment amount is $10,021.31 x (179.86159/100), or $18,024.49 (no 
intermediate rounding).
* * * * *
    6. Exhibit C to Part 356 is amended by revising the heading to read 
as follows:

Exhibit C to Part 356--Minimum Par Amounts for Fixed-Principal 
STRIPS

* * * * *
[FR Doc. 97-31953 Filed 12-5-97; 8:45 am]
BILLING CODE 4810-39-P


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