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.. .03625 (the decimal equivalent of a 3-5/8% interest rate) Par par amount of the security to be stripped

Ref CPIIssue Date-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 CPIDate=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 CPIIssue Date) (rounded to 2 decimals with no intermediate rounding)

PA=AV (Ref CPIDate/100) (rounded to 2 decimals with no intermediate rounding) Example. A 10-year inflation-indexed note paying 32% interest is issued on January 15, 1999, with the second interest payment on January 15, 2000. The Ref CPI on January 15, 1999 (Ref CPIssue Date) is 174.62783, and the Ref CPI on January 15, 2000 (Ref CPIDate) is 179.86159. Calculate the adjusted value and the payment amount at maturity of the interest component.

Resolution:

P=100 [(1-dr)/360]

(1) P=100 (1−(.0761)(90)/360]

(2) P=100 (1-.019025)

(3) P=100 (.980975) (4) P=98.0975

(5) P=98.098

NOTE: Purchase prices per $100 are rounded to three decimal places, using normal rounding procedures.

B. Computation of purchase prices and discount amounts based on price per $100, for Treasury bills of all maturities:

1. To determine the purchase price of any bill, divide the par amount by 100 and multiply the resulting quotient by the price per $100.

Example. To compute the purchase price of a $10,000 13-week bill sold at a price of $98.098 per $100, divide the par amount ($10,000) by 100 to obtain the multiple (100). That multiple times 98.098 results in a purchase price of $9,809.80.

2. To determine the discount amount for any bill, subtract the purchase price from the par amount of the bill.

Example. For a $10,000 bill with a purchase price of $9,809.80, the discount amount would be $190.20, or $10,000-$9,809.80.

C. Conversion of prices to discount rates for Treasury bills of all maturities:

100-95.930 360

d

=

100

X 182

(1)

(2) d=[.0407×1.978022]

(3) d=.080506

(4) d=8.051%

NOTE: Prior to April 18, 1983, all bills were sold in price-basis auctions, in which discount rates calculated from prices were rounded to three places, using normal rounding procedures. Since that time, all bills have been sold only on a discount rate basis. For regular Treasury bills-13-, 26-, and 52week bills-discount rates bid were submitted with two decimals in increments of .01 percent, e.g., 5.32, until 1997, when Treasury instituted a change to three decimal bidding in increments of .005 percent, e.g., 5.320 or 5.325.

D. Calculation of investment rate (couponequivalent yield) for Treasury bills:

1. For bills of not more than one half-year to maturity:

i=investment rate, in decimals P=price per 100 (dollars)

r-number of days remaining to maturity y=number of days in year following the issue

date; normally 365 but, if the year following the issue date includes February 29, then y is 366.

Example:

For a cash management bill issued June 1. 1990, due June 21, 1990, with a price of $99.559 (computed from a discount rate of 7.93%). solve for the investment rate (i).

Definitions:

P=99.559

r=20 (June 1, 1990, to June 21, 1990) y=365

Resolution:

190-115 D-00--13

APPENDIX C TO PART 356-INVESTMENT CONSIDERATIONS

I. INFLATION-INDEXED SECURITIES

A. Principal and Interest Variability An investment in securities with principal or interest determined by reference to an inflation index involves factors not associated with an investment in a fixed-principal security. Such factors may include, without limitation, the possibility that the inflation index may be subject to significant changes, that changes in the index may or may not correlate to changes in interest rates generally or with changes in other indices, that the resulting interest may be greater or less than that payable on other securities of

similar maturities, and that, in the event of sustained deflation, the amount of the semiannual interest payments, the inflation-adjusted principal of the security, and the value of stripped components, will decrease. However, if at maturity the inflation-adjusted principal is less than a security's par amount, an additional amount will be paid at maturity so that the additional amount plus the inflation-adjusted principal equals the par amount. Regardless of whether or not such an additional amount is paid, interest payments will always be based on the inflation-adjusted principal as of the interest payment date. If a security has been stripped, any such additional amount will be paid at maturity to holders of principal components only. (See § 356.30.)

B. Trading in the Secondary Market

The Treasury securities market is the largest and most liquid securities market in the world. While Treasury expects that there will be an active secondary market for inflation-indexed securities, that market initially may not be as active or liquid as the secondary market for Treasury fixed-principal securities. In addition, as a new product, inflation-indexed securities may not be as widely traded or as well understood as Treasury fixed-principal securities. Lesser liquidity and fewer market participants may result in larger spreads between bid and asked prices for inflation-indexed securities than the bid-asked spreads for fixed-principal securities with the same time to maturity. Larger bid-asked spreads normally result in higher transaction costs and/or lower overall returns. The liquidity of an inflationindexed security may be enhanced over time as Treasury issues additional amounts or more entities participate in the market.

C. Tax Considerations

Treasury inflation-indexed securities and the stripped interest and principal components of these securities are subject to specific tax rules provided by Treasury regulations issued under sections 1275(d) and 1286 of the Internal Revenue Code of 1986, as amended.

D. Indexing Issues

While the CPI measures changes in prices for goods and services, movements in the CPI that have occurred in the past are not necessarily indicative of changes that may occur in the future.

The calculation of the index ratio incorporates an approximate three-month lag, which may have an impact on the trading price of the securities, particularly during periods of significant, rapid changes in the index.

The CPI is reported by the Bureau of Labor Statistics, a bureau within the Department of Labor. The Bureau of Labor Statistics operates independently of the Treasury and, therefore, Treasury has no control over the determination, calculation, or publication of the index. For a discussion of how the CPI will be applied in various situations, see appendix B, section I, paragraph B. In addition, for a discussion of actions that Treasury would take in the event the CPI is: discontinued; in the judgment of the Secretary, fundamentally altered in a manner materially adverse to the interests of an investor in the security; or, in the judgment of the Secretary, altered by legislation or Executive Order in a manner materially adverse to the interests of an investor in the security, see appendix B, section I, paragraph B.4.

[62 FR 873, Jan. 6, 1997]

APPENDIX D TO PART 356-DESCRIPTION OF THE CONSUMER PRICE INDEX

The Consumer Price Index ("CPI") for purposes of inflation-indexed securities is 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 Department of Labor. The CPI is a measure of the average change in consumer prices over time in a fixed market basket of goods and services, including food, clothing, shelter, fuels, transportation, charges for doctors' and dentists' services, and drugs.

In calculating the index, price changes for the various items are averaged together with weights that represent their importance in the spending of urban households in the United States. The contents of the market basket of goods and services and the weights assigned to the various items are updated periodically to take into account changes in consumer expenditure patterns.

The CPI is expressed in relative terms in relation to a time base reference period for which the level is set at 100. For example, if the CPI for the 1982-84 reference period is 100.0, an increase of 16.5 percent from that period would be shown as 116.5. The CPI for a particular month is released and published during the following month. From time to time, the CPI is rebased to a more recent base reference period. The base reference period for a particular inflation-indexed security will be provided on the offering announcement for that security.

Further details about the CPI may be obtained by contacting the Bureau of Labor Statistics.

[62 FR 873, Jan. 6, 1997]