Regulations Governing United States Treasury Certificates of Indebtedness, Treasury Notes, and Treasury BondsState and Local Government Series

Federal RegisterOct 28, 1996

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SUMMARY: The Department of the Treasury hereby publishes a final rule

governing United States Treasury Certificates of Indebtedness, Notes,

and Bonds of the State and Local Government Series (SLGS). These

securities are available for purchase by issuers of state and local

government bonds described in Section 103 of the Internal Revenue Code

for proceeds (or amounts treated as proceeds) which are subject to

yield restrictions or arbitrage rebate requirements of the Income Tax

regulations under sections 103, 148, 149 and 150 of the Internal

Revenue Code (tax regulations). This final rule makes the SLGS

securities program more flexible in a manner consistent with tax policy

objectives.

DATEs: The regulations are effective October 28, 1996, for securities

where the subscription is received on or after October 28, 1996 and are

applicable except that the revised notice period for early redemptions

applies to all SLGS issues. Subscribers for SLGS securities can

continue to use the current forms, lining out any obsolete parts, until

new forms are distributed.

FOR FURTHER INFORMATION CONTACT: Fred Pyatt, Director, or Howard

Stevens, Supervisory Program Analyst, Division of Special Investments,

at 304-480-7752 or Ed Gronseth, Deputy Chief Counsel, or Jim Kramer-

Wilt, Attorney/Adviser, Office of the Chief Counsel, at 304-480-5190.

SUPPLEMENTARY INFORMATION:

I. Background

The Department of the Treasury, Bureau of the Public Debt, is

attempting to make the SLGS securities program more attractive and

flexible for State and local government issuers of debt obligations

that are subject to the arbitrage and rebate rules of the Internal

Revenue Code. It is the Department's intent to do so in a manner

consistent with tax policy objectives and in a manner that is cost

effective.

In recent years, market participants have advised the Department

that aspects of the existing SLGS securities regulations impose burdens

that are not needed or cost effective. On April 30, 1996, the

Department published an Advanced Notice of Proposed Rulemaking, noting

ten general changes the Department was considering in order to make the

SLGS securities program more flexible.

There were eight letters received commenting on the Advanced Notice

of Proposed Rulemaking (ANPR). In general, the comments were in favor

of the ten items contained in the ANPR. Several comments suggested

specific parameters for some of the ten items while others suggested

the Treasury Department consider changes not contained in the ANPR.

On July 26, 1996, the Department published a proposed rule,

outlining specific changes to the SLGS securities program. There were

five letters received which provided seven different comments on the

proposed rule.

(a) One commenter suggested that the Department consider amending

31 CFR Sec. 344.2(a)(3) to permit issuing bonds with a maturity period

exceeding 30 years. The commenter acknowledged that the calculation of

SLGS securities rates past the 30-year yield curve would be difficult

and indicated a willingness to accept a 30-year rate for maturities in

excess of 30 years.

The Department amended the final rule to permit the issuance of

bonds with maturities of up to 40 years. The maximum applicable rate

for securities with a maturity in excess of 30 years is the 30-year

rate.

(b) There were four comments received concerning the apparent

elimination of the ``mailbox rule''. This rule had provided that the

applicable rate table for any subscription was the one in effect on the

date the initial subscription was faxed, post-marked or carrier date-

stamped, rather than on the date received under the proposed rule. The

commenters argued that if a subscriber could not lock in the SLGS rate

on the pricing date, many issuers will choose open market securities in

order to lock in the required yield.

The commenters argued for issuers to have the option to use the

mailbox rule, rather than the ``actual receipt'' rule. The comments

suggested that in order to accommodate the Department's need for five

or seven days notice, the regulations should permit the issuer to lock

in the maximum interest rate by mailing the initial subscription, so

long as a copy of the initial subscription form (clearly marked to

indicate it is a duplicate of the mailed subscription), together with

proof of mailing is separately sent by means reasonably designed to

arrive at the Bureau of the Public Debt within the required five/seven

days notice period.

The Department considered this suggestion and amended the final

rule to provide that an issuer can either lock in a SLGS rate with a

timely fax to the Division of Special Investments, or, if a

subscription is mailed, it must be received by Public Debt on or before

the required five/seven day notice period in order to lock in the SLGS

rate for the day of mailing.

The Department considers it the responsibility of the subscriber to

confirm the receipt of any fax sent to Public Debt. The Division of

Special Investments has multiple fax machines that register the fax

number of the subscriber, even if a paper jam occurs. Therefore,

subscribers sending faxed subscriptions after the close of business at

Public Debt on the last day of the notice period should not have a

problem getting their fax timely received or getting confirmation the

next morning. If a failed attempt to subscribe is confirmed the

following morning, the subscriber can lock in the SLGS rates for the

previous day by immediately faxing another subscription.

proposed rule of two new standards under which the Secretary can revoke

a subscription, 31 CFR Sec. 344.1(f)(3)(ii) and 31 CFR

Sec. 344.1(f)(3)(iii), are too ambiguous and, unlike non-callable open

market securities, permit the revocation of a SLGS subscription after

issuance. One of the commenters suggested that the previous language be

reinstated and that the regulations require a certification by the

subscriber that the amounts invested were gross proceeds of a tax-

exempt bond. Another commenter suggested that the authority of the

Secretary to revoke issuance of SLGS securities be limited to

circumstances where the issuance of SLGS securities is inconsistent

with the SLGS regulations and the Secretary determines that revocation

is in the public interest.

The Department considered the issues raised by these comments and

has deleted the language of the proposed regulations and has retained

the authority of the Secretary to revoke subscriptions for improper

certifications consistent with the previous regulations. Use of SLGS

securities in a manner which violates the tax regulations will be dealt

with under the tax laws.

(d) Another comment suggested that the Department consider issuing

zero interest SLGS securities where the

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subscriptions for such securities are received more than 60 days before

the issue date (the current requirement). The suggestion was that the

Department extend this period to one year.

The Department decided that maintaining subscription requests for

longer than 60 days is an administrative burden and is not including

this suggestion in the final rule.

(e) One comment suggested that Public Debt put the daily SLGS

interest rate table on the World Wide Web.

Public Debt is currently posting these rates on the Internet at

ftp://ftp.publicdebt.treas.gov/secrate.txt

(f) Another comment advised that the terms used in the summary of

the proposed regulations and the text of the proposed regulations to

describe amounts which can be invested in SLGS securities are

inconsistent and create ambiguity.

The Department considered the suggestion and amended section

344.0(a) to specify that SLGS can be purchased with any amounts that

constitute gross proceeds of an issue or any other amounts which assist

an issuer of tax-exempt bonds in complying with any applicable

provisions of the Internal Revenue Code relating to such tax exemption.

(g) The final comment expressed the concern that the requirement

for a subscriber to provide the employer identification number only for

the issuer would unfairly penalize issuers in cases where the six-month

penalty for failure to settle a SLGS securities subscription is due to

the actions of a conduit borrower.

The concern of the commenter was that most states and cities have

loan programs for various purposes such as housing, health care and

education which service multiple conduit obligors. However, if any one

conduit obligor's failure to comply could subject all conduit obligors

under such a program to a six-month freeze-out, then no conduit obligor

could structure its plan of investment based on the assumption that

SLGS securities would be available to it as needed.

The Department decided to amend the language of section 344.1(h) to

provide that the six-month penalty applies to the government body

unless the government body provides the Tax Identification Number of

the conduit borrower to the Department when non-settlement occurs.

The Department made three additional changes that clarify or

improve the SLGS securities program.

(i) In section 344.5(a)(3)(ii), it is now clear that either a

premium or discount can occur when calculating early redemption value,

depending on whether the Treasury borrowing rate is lower or higher

than the stated interest rate of the early-redeemed SLGS security.

The Department added language to this section and to Appendix B to

make this clarification.

(ii) The maximum amount by which a subscription can be amended is

given greater flexibility by making the standard of section

344.3(b)(3)(ii) ``the greater of $10 million or ten percent of the

initial subscription amount.''

(iii) Section 344.5(a)(3)(ii) is revised to read that the term

``current Treasury borrowing rate'' means the applicable rate shown in

the table of maximum interest rates payable on United States

securities--State and Local government Series, for the day the request

for early redemption is received by Public Debt, plus 5 basis points.

Sections 344.5(a)(4)(ii) and 344.5(a)(5)(iii) are revised to refer to

the definition of the term ``current Treasury borrowing rate'' as set

forth in section 344.5(a)(3)(ii).

II. Section By Section Summary

Subpart A--General Information

Provisions included in the general information section apply to time

deposit and demand deposit State and Local Government Series

securities. Changes from the 1995 regulations are as follows:

Subpart A--General Information

(1) Section 344.0(a)--This section is amended to read that SLGS can

be purchased with any amounts that constitute gross proceeds of an

issue or any other amounts which assist an issuer of tax-exempt bonds

in complying with applicable provisions of the Internal Revenue Code

relating to such tax exemption.

(2) Section 344.0(b)--This section is changed to redefine the term

``government body'' to make it clear SLGS securities are issued only to

state and local governments and not to conduit borrowers.

(3) Section 344.0(c)--A new section is added to indicate that time

deposit SLGS securities are issued in a minimum amount of $1,000, or in

any increments of not less than $1.00. Demand Deposit securities are

still issued in any increment over the $1,000 minimum. The minimum

maturity period for zero percent certificates of indebtedness is

reduced from thirty days to fifteen days.

(4) Section 344.1(a)--This section is changed to note that copies

of the circular can be obtained from the Division of Special

Investments.

(5) Section 344.1(h)--A new section is added on noncompliance which

applies to all subparts and the previous noncompliance section in each

subpart is deleted. This section also clarifies that late payment fees

and administrative fees are due on demand. This section further

clarifies that the term ``government body'' is defined as the state or

local government entity rather than the conduit borrower for the

placement of the penalty for non-compliance, unless the state or local

government entity provides the Tax Identification Number of the conduit

borrower that caused the non-settlement to occur.

(6) Section 344.1(i)--Another general section is added, titled

General Redemption Provisions, stating a security will not be called

for redemption by the Secretary of the Treasury prior to maturity. If a

security matures on a non-business day, it will be redeemed on the next

business day. This section applies to all subparts and duplications of

this section that exist in the previous regulations are deleted.

(7) Section 344.1(j)--A new section is added to clarify that any

reference to days refers to calendar days, unless otherwise noted.

Subpart B--Time Deposit Securities

(1) Section 344.2(a)(1)--The reference to the $1,000 minimum is

deleted.

(2) Section 344.2(a)(2)--In light of Section 344.0(c), the

reference to the $1,000 minimum amount and the $100 increment above

this amount is deleted.

(3) Section 344.2(a)(3)--In light of Section 344.0(c), the

reference to the $1,000 minimum amount and the increment above this

amount is deleted. This section is also amended to provide for the

issuance of bonds with maturities up to 40 years. The maximum

applicable rate for securities with maturities in excess of 30 years is

the 30-year rate.

(4) Section 344.2(b)--The last sentence of this section states the

rates specified in the tables are five basis points below the then

current estimated Treasury borrowing rate for a security of comparable

maturity.

(5) Section 344.2(c)(2)--This section is amended to provide for

alternative methods of payment of redemptions prior to maturity, such

as by Fedwire.

(6) Section 344.3(b)(1)--This section is amended to indicate that

subscriptions must be received by Public Debt at least five days prior

to issue date for subscriptions of $10 million or less and seven days

for subscriptions of more than $10 million. Subscriptions of $10

million or less can be canceled without penalty up to five

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days before the date of issuance. Subscriptions of more than $10

million can be canceled without penalty up to seven days before the

date of issuance.

This section also notes that a subscription sent in letter form

will not be accepted unless it provides the Tax Identification Number

of the government body.

In the example of an initial subscription in letter form, the words

``or other entity'' have been deleted to emphasize that the proper Tax

Identification Number to insert is that of the state or local

government owner, not that of a trustee bank or a conduit borrower.

This section further provides that a subscriber can lock in the

SLGS rates for the day it either sends a fax to Public Debt on or

before the five/seven day notice period or by mailing a subscription,

provided the mailed subscription is received by Public Debt on or

before the five/seven day notice period. It is the responsibility of

the sender of the fax to confirm its receipt.

(7) Section 344.3(b)(4)--This section is revised to read that no

initial subscription is required when a final subscription is received

at least five days before the issue date for subscriptions of $10

million or less or at least seven days before the issue date for

subscriptions of over $10 million.

(8) Section 344.3(c)--This section is amended to eliminate all

certifications other than the former section 344.3(c)(3), which has

been revised. The ``all or nothing'' rule of the certification in the

former section 344.3(c)(1) is eliminated to facilitate the use of the

time deposit securities for investment of proceeds that are subject to

arbitrage rebate. This change alleviates some of the need to calculate

rebate if funds can be invested at the bond yield for a longer term. In

general, to the extent that the certifications were a result of

concerns about abuse of the tax regulations and the SLGS program, the

Department determined that the yield restriction and rebate rules are

more appropriately enforced under the tax regulations. The

certification formerly in section 344.3(c)(3) is revised to apply only

to SLGS securities subscribed for prior to December 27, 1976. The

certification formerly in section 344.3(c)(4) is eliminated because of

certain prior changes to the SLGS securities regulations (such as the

change to daily SLGS securities rates), and because of changes to the

early redemption penalties under section 344.5, contained in these

final regulations. Additionally, the word ``beneficial owner'' is

changed to ``government body'' to make it clear that the proper Tax

Identification Number is that of the government entity.

(9) Section 344.3(b)(3)(ii)--This section is amended to read that

the aggregate subscription amount can not be changed by more than the

greater of $10 million or ten percent of the initial subscription

amount.

(10) Section 344.4(b)--This section is eliminated.

(11) Section 344.3(b)(4)(c)--This section is amended to read that

the final subscription must be for a total principal amount that is no

more than the greater of either $10 million or ten percent above or

below the aggregate principal amount specified in the initial

subscription.

(12) Section 344.5(a)--This section is eliminated.

(13) Section 344.5(b)(1)--This section is renumbered 344.5(a)(1)

and is amended to provide that zero interest certificates can be

redeemed before maturity at the owner's option no earlier than fifteen

days before maturity for certificates of fifteen to twenty-nine days

duration and no earlier than thirty days after the issue date in the

case of all other certificates, notes or bonds.

(14) Section 344.5(a)(2)--This section is a new section number and

the body of the section consists of the former section 344.5(b)(2). It

is amended to change the word ``subscriber'' to ``government body'' in

the 3rd sentence of this section. This section is further amended to

read that notice of redemption must be received by Public Debt no less

than ten days before the requested redemption date, rather than the

current fifteen-day requirement.

(15) Section 344.5(a)(3)--This is a new section which provides for

the calculation of redemption proceeds for SLGS securities subscribed

for on or after the effective date of this final rule. This section

changes the formula for determining the early redemption value of SLGS

securities to one where the remaining interest and principal payments

are discounted by the current Treasury borrowing rate for the remaining

term to maturity of the security redeemed.

This results in a premium or a discount in cases where the Treasury

borrowing rate is lower or higher than the stated interest rate of the

SLGS securities. This section further refers to Appendix B at the end

of Part 344 for the calculation of the formula.

This section provides no market charge for zero interest time

deposit securities. The redemption proceeds for a zero interest

security are a return of the principal invested.

(16) Sections 344.5(a)(3)(ii), 344.5(a)(4)(ii) and 344.5(a)(5)(iii)

are amended to redefine the term ``current Treasury borrowing rate''.

The term is defined in section 344.5(a)(3)(ii) and the other two

sections refer to the definition in this section.

(17) Sections 344.5(b)(3), (b)(4) and (b)(5)--These sections are

renumbered 344.5(a)(4), (a)(5) and (a)(6) respectively and remain

unchanged.

Subpart C--Demand Deposit Securities

(1) Section 344.6(a)--This section is revised to delete the

reference to a $1,000 minimum investment. This is now incorporated into

the new general section, 344.0(c).

(2) Section 344.6(b)(3)--Simultaneously with the publication of

these final regulations, the Department is publishing a Federal

Administrative Cost (TAC) used in the demand deposit program.

(3) Section 344.7(a)--This section is amended by stating that

subscriptions for $10 million or less must be received by Public Debt

at least five days prior to the date of issue and requires that

subscriptions of over $10 million be received by Public Debt at least

seven days prior to the date of issue.

(4) Section 344.7 (c)(1)--This section is removed since under the

final rule, the $35 million cap on issues of demand deposit securities

is eliminated.

(5) Section 344.7(c)(2) through (c)(6)--These sections are

eliminated because the certifications can be administered more

effectively under the tax regulations of Section 148 of the Internal

Revenue Code. The tax regulations will be amended to reflect the

transfer of these certifications (to the extent not already covered by

the tax regulations).

(6) Section 344.8(b)--This section is eliminated.

(7) Section 344.9(a)--This section is amended to state that notice

of redemptions for subscriptions of more than $10 million must be

received at least three business days prior to the scheduled date of

redemption. Redemption notice for subscriptions of $10 million or less

remains unchanged at one business day. This section also provides for

payments by Fedwire.

(8) Section 344.9(c)--This section is eliminated because the rules

regarding expenditure of proceeds are covered by the tax regulations.

Subpart D--Special Zero Interest Securities

(1) Section 344.10--This section is amended to state that the

Department has discontinued the issuance of this type of security as of

October 28, 1996.

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The amendment to the time deposit security subpart, which permits

investment for rebate and yield restriction purposes, eliminates the

need for a separate Special Zero Interest Program. Under the revisions,

the following sections of this Subpart apply only to special zero

interest securities subscribed for before October 28, 1996. Subpart B,

governing time deposit securities, is changed in a manner that permits

the redemption of time deposit zero interest securities without

penalty. Investors that hold special zero interest securities

subscribed for before October 28, 1996 can still redeem these

securities without penalty.

(2) Section 344.11--This section is eliminated.

(3) Section 344.12--This section is eliminated.

(4) Section 344.13--This section is renumbered section 344.11 and

remains in effect for the special zero interest accounts now

outstanding. The word ``subscriber'' is changed to ``government body''

to clarify that the proper Tax Identification Number is that of the

government entity. Redemption notices must be received by Public Debt

within the proscribed limits.

Appendix A to Part 344--There is a clarifying statement that these

formulas apply to SLGS securities subscribed for before the effective

date of this final rule.

Appendix B to Part 344--This appendix contains a new formula for

determining the redemption value for all early-redeemed time deposit

SLGS securities. This formula reflects the change that the remaining

interest and principal payments are discounted by the Treasury

borrowing rate for the remaining term to maturity of the security

redeemed. This results in a premium or a discount, depending on whether

the Treasury borrowing rate is lower or higher than the stated interest

rate of the SLGS security.

Procedural Requirements

This final rule is not a significant regulatory action as defined

in Executive Order 12866. Therefore, an assessment of anticipated

benefits, costs and regulatory alternatives is not required.

This final rule relates to matters of public contract and

procedures for United States securities. 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 was required, the provisions of the Regulatory

Flexibility Act (5 U.S.C. 601 et seq.) do not apply.

The final rule does not alter the collection of information

previously reviewed and approved by the Office of Management and

Budget, in accordance with the requirements of the Paperwork Reduction

Act (44 U.S.C. 3507) under control number 1535-0091. The principal

purpose of the final rule is to make the SLGS securities program more

attractive and flexible for investors. The revision does not impose a

new collection of information requirement.

List of Subjects in 31 CFR Part 344

Bonds, Government securities, Securities.

Dated: October 21, 1996.

Gerald Murphy,

Fiscal Assistant Secretary.

For the reasons set forth in the preamble, Part 344 of title 31 of

the Code of Federal Regulations is revised to read as follows:

PART 344--REGULATIONS GOVERNING UNITED STATES TREASURY CERTIFICATES

OF INDEBTEDNESS, TREASURY NOTES, AND TREASURY BONDS--STATE AND

LOCAL GOVERNMENT SERIES

Subpart A--General Information

Sec.

344.0 Offering of securities.

344.1 General provisions.

Subpart B--Time Deposit Securities

344.2 Description of securities.

344.3 Subscription for purchase.

344.4 Issue date and payment.

344.5 Redemption.

Subpart C--Demand Deposit Securities

344.6 Description of securities.

344.7 Subscription for purchase.

344.8 Issue date and payment.

344.9 Redemption.

Subpart D--Special Zero Interest Securities

344.10 General.

344.11 Redemption.

Appendix A to Part 344--Early Redemption Market Charge Formulas and

Examples for Subscriptions From September 1, 1989, Through October 27,

1996

Appendix B to Part 344--Formula for Determining Redemption Value for

Securities Subscribed for and Early-Redeemed on or After October 28,

1996

Authority: 26 U.S.C. 141 note; 31 U.S.C. 3102.

Subpart A--General Information

Sec. 344.0 Offering of securities.

(a) In order to provide issuers of tax exempt securities with

investments from any amounts that constitute gross proceeds of an issue

or any other amounts which assist an issuer of tax-exempt bonds in

complying with applicable provisions of the Internal Revenue Code

relating to such tax exemption, the Secretary of the Treasury offers

for sale the following State and Local Government Series securities:

(1) Time deposit securities:

(i) United States Treasury Certificates of Indebtedness,

(ii) United States Treasury Notes, and

(iii) United States Treasury Bonds.

(2) Demand deposit securities--United States Treasury Certificates

of Indebtedness.

(b) As appropriate, the definitions of terms used in Part 344 are

those found in the relevant portions of the Internal Revenue Code and

the tax regulations. The term ``government body'' refers to issuers of

state or local government bonds described in section 103 of the

Internal Revenue Code.

minimum amount of $1,000, or in any larger amount, in increments of not

less than $1.00 for time deposit securities and in any increments over

the $1,000 minimum for demand deposit securities.

(d) This offering continues until terminated by the Secretary of

the Treasury.

Sec. 344.1 General provisions.

(a) Regulations. United States Treasury securities--State and Local

Government Series shall be subject to the general regulations with

respect to United States securities, which are set forth in the

Department of the Treasury Circular No. 300 (31 CFR Part 306), to the

extent applicable. Copies of the circular can be obtained from the

Bureau of the Public Debt, Division of Special Investments--Room 309,

200 Third Street, P.O. Box 396, Parkersburg, WV 26102-0396.

(b) Issuance. The securities are issued in book-entry form on the

books of the Department of the Treasury, Bureau of the Public Debt,

Parkersburg, WV. Transfer of securities by sale, exchange, assignment,

pledge, or otherwise is not permitted.

time deposit, demand deposit, or special zero interest, cannot be

transferred within that account or to an account of any other type.

(d) Fiscal agents. Selected Federal Reserve Banks and Branches, as

fiscal agents of the United States, can be designated to perform such

services requested of them by the Secretary of the Treasury in

connection with the

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purchase of, transactions involving, and redemption of, the securities.

(e) Authority of subscriber. Where a commercial bank submits an

initial or final subscription on behalf of a government body, it must

certify it is acting under the latter's specific authorization.

Ordinarily, evidence of such authority is not required. Subscriptions

submitted by an agent, other than a commercial bank, must be

accompanied by evidence of the agent's authority to act. Such evidence

must describe the nature and scope of the agent's authorization, must

specify the legal authority under which the agent was designated, and

must relate by its terms to the investment action undertaken.

Subscriptions unsupported by such evidence are not acceptable.

(f) Reservations. Transaction requests, including requests for

subscription and redemption, are not acceptable if unsigned,

inappropriately completed, or not timely submitted. Any of these

actions shall be final. The authority of the Secretary to waive

regulations under 31 CFR 306.126 applies to Part 344. The Secretary of

the Treasury reserves the right:

(1) To reject any application for the purchase of securities under

this offering;

(2) To refuse to issue any such securities in any case or any

class(es) of cases; and

(3) To revoke the issuance of any security, and to declare the

subscriber ineligible thereafter to subscribe for securities under this

offering, if any security is issued on the basis of an improper

certification or other misrepresentation by the subscriber (other than

as the result of an inadvertent error), if the Secretary deems such

action in the public interest.

(g) Debt limit contingency. The Department of the Treasury reserves

the right to change or suspend the terms and conditions of this

offering, including provisions relating to subscriptions for, and

issuance of, securities, interest payments, redemptions, and rollovers,

as well as notices relating hereto, at any time the Secretary

determines that the issuance of obligations sufficient to conduct the

orderly financing operations of the United States cannot be made

without exceeding the statutory debt limit. Announcement of such

changes shall be provided by such means as the Secretary deems

appropriate.

(h) Noncompliance. The penalty imposed on any government body which

fails to make settlement on a subscription once submitted and not

canceled timely shall be to render the government body ineligible

thereafter to subscribe for securities under any offering in Part 344

for a period of six months, beginning on the date the subscription is

withdrawn or the proposed issue date, whichever occurs first.

(1) The penalty is imposed on the government body unless the

government body provides the Tax Identification Number of a conduit

borrower that is the actual party failing to make settlement of a

subscription. If this number is provided for a conduit borrower, the

conduit borrower shall be the entity on which the six-month penalty is

imposed.

(2) The Division of Special Investments can determine to waive the

six-month penalty, pursuant to the provisions governing the waiver of

regulations set forth under 31 CFR 306.126. Where settlement occurs

after the proposed issue date and the Division of Special Investments

determines, pursuant to 31 CFR 306.126, that settlement is acceptable

on an exception basis, the six-month penalty will be waived and the

government body shall be subject to a late payment assessment. The late

payment assessment will equal the amount of interest that will have

accrued on the securities from the proposed issue date to the date of

settlement, as well as an administrative fee of $100 per subscription.

Assessments of late payment fees and administrative fees under Part 344

are due on demand.

(i) General redemption provisions. A security can not be called for

redemption by the Secretary of the Treasury prior to maturity. Upon the

maturity of a security, the Department will make payment of the

principal amount and interest due to the owner thereof. A security

scheduled for maturity on a non-business day will be redeemed on the

next business day.

(j) Business or calendar days. Unless otherwise noted, any

reference herein to days refers to calendar days.

Subpart B--Time Deposit Securities

Sec. 344.2 Description of securities.

(a) Terms. (1) Certificates. The certificates are issued with

maturity periods fixed by the government body, from thirty days up to

and including one year, or for any intervening period; provided, for

certificates that bear no interest, the maturity period can be fixed by

the government body from fifteen days up to and including one year or

for any intervening period.

(2) Notes. The notes are issued with maturity periods fixed by the

government body, from one year and one day up to and including ten

years, or for any intervening period.

(3) Bonds. The bonds are issued with maturity periods fixed by the

government body, from ten years and one day up to and including forty

years, or for any intervening period; provided that for any

subscription for a bond exceeding 30 years, the maximum available rate

shall be the rate on a 30-year bond.

(b) Interest rate. Each security shall bear such rate of interest

the government body designates, but the rate shall not exceed the

maximum interest rate. The applicable maximum interest rates for each

day shall equal rates shown in a SLGS securities rate table, which is

released by the Department to the public by 10:00 a.m., Eastern time,

each business day. If the Department finds that due to circumstances

beyond its control the rates are not available to the public by 10:00

a.m., Eastern time, on any given business day, the applicable interest

for the last preceding business day shall apply. The applicable rate

table for any subscription is the one in effect on the date the initial

subscription is faxed, postmarked or carrier date stamped. The rates

specified in the tables are five basis points below the then current

estimated Treasury borrowing rate for a Treasury security of comparable

maturity. These rates can be obtained:

(1) In the Commerce Department's Economic Bulletin Board;

(2) By contacting the Division of Special Investment's automated

fax at (304) 480-7548;

(3) By calling the Division of Special Investments at (304) 480-

7752; or

(4) On the Internet at ftp://ftp.publicdebt.treas.gov/secrate.txt

on a certificate is computed on an annual basis and is paid at maturity

with the principal. Interest on a note or bond is paid semi-annually.

The government body specifies the first interest payment date, which

must occur any time between thirty days and one year of the date of

issue, and the final interest payment date must coincide with the

maturity date of the security. Interest for other than a full semi-

annual interest period is computed on the basis of a 365-day or 366-day

year (for certificates) and on the basis of the exact number of days in

the half-year (for notes and bonds). See the appendix to subpart E of

Part 306 of this chapter for rules regarding computation of interest.

(2) Method of payment. Payment can be made by the Automated

Clearing House method (ACH) for the owner's account at a financial

institution

[[Page 55695]]

designated by the owner. Redemptions prior to maturity are paid by

Fedwire. To the extent applicable, provisions of Sec. 357.26 on

``Payments'', set forth in 31 CFR Part 357 and provisions of 31 CFR

Part 370, shall govern ACH payments made under this offering. The

Department of the Treasury can employ alternate payment procedures,

instead of ACH, in any case, or class of cases where operational

considerations necessitate such action.

Sec. 344.3 Subscription for purchase.

(a) Subscription requirements. Subscriptions for purchase of

securities under this offering must be submitted to the Division of

Special Investments, Bureau of the Public Debt, 200 Third Street, P.O.

Box 396, Parkersburg, WV 26102-0396. Initial and final subscriptions

can be submitted by fax at (304) 480-6818, by mail, or by other

carrier. All subscriptions submitted by mail, whether initial or final,

should be sent by certified or registered mail.

(b) Initial subscriptions. (1) An initial subscription, either on a

designated Treasury form or in letter form, stating the principal

amount to be invested and the issue date, must be received by Public

Debt at least five days before the issue date for subscriptions of $10

million or less, and at least seven days before the issue date for

subscriptions of over $10 million, but in no event will subscriptions

be received more than 60 days prior to issue date. Subscriptions can be

sent by fax on (304) 480-6818, carrier service, U.S. Postal Service or

other means. If the subscription is faxed, the original document must

be received by Public Debt no later than the issue date. Initial

subscriptions of $10 million or less can be canceled without penalty by

the subscriber prior to the fifth day before issue date. If the fifth

day before issue date is a non-business day, the cancellation must

occur on the preceding business day. Subscriptions of more than $10

million can be canceled without penalty by the subscriber prior to the

seventh day before issue date. For example, if securities totaling $10

million or less are to be issued on March 16, the initial subscription

must be received by Public Debt no later than March 11. If securities

totaling more than $10 million are to be issued on March 16, the

initial subscription must be received by Public Debt no later than

March 9. A subscriber can lock in the SLGS rate for the day it submits

its subscription by sending a fax to the Division of Special

Investments on or before the five/seven day notice period. A subscriber

can also lock in the SLGS rate on the date of the postmark of a mailed

subscription, provided the subscription is received on or before the

five/seven day notice period. It is the responsibility of the sender of

a faxed subscription to confirm its receipt. If the initial

subscription is in letter form, it must contain the Tax Identification

Number of the government body or it is unacceptable. It should read

substantially as follows:

To: Bureau of the Public Debt

----------------------------------------------------------------------

Pursuant to the provisions of Department of the Treasury

Circular, Public Debt Series No. 3-72, current revision, the

undersigned hereby subscribes for United States Treasury Time

Deposit Securities--State and Local Government Series, issued as

entries on the books of the Bureau of the Public Debt, Department of

the Treasury, in the total amount and with the issue date shown

below, which date is at least five/seven days after the date of this

subscription:

Principal Amount

$----------------------------------------------------------------------

Issue Date

----------------------------------------------------------------------

The undersigned agrees the final subscription and payment will

be submitted on or before the issue date.

----------------------------------------------------------------------

(Tax I.D. Number of state or local government body eligible to

purchase State and Local Government Series securities)

----------------------------------------------------------------------

(Name of state or local government body eligible to purchase State

and Local Government Series securities)

(Date)-----------------------------------------------------------------

By---------------------------------------------------------------------

(Signature and Title)

(2) The provisions set out in paragraph (e) of Sec. 344.1, dealing

with the authority of the subscriber to act on behalf of a government

body, and in Sec. 344.1(h), relating to the failure to complete a

subscription, apply to initial and to final subscriptions.

(3) An initial subscription can be amended on or before the issue

date, but no later than 3:00 p.m., Eastern time, on the issue date.

Notification can be faxed to the Bureau of the Public Debt at (304)

480-6818 provided the request is clearly identified as an amendment and

is immediately followed by the submission, by mail or other carrier, of

written notification. Amendments to initial subscriptions are

acceptable with the following exceptions:

(i) The issue date can not be changed to require issuance earlier

than the issue date originally specified. The issue date can be changed

up to 7 days after the original issue date. If such a change is made,

notification should be provided to the Bureau of the Public Debt as

soon as possible, but no later than 3:00 p.m., Eastern time, one

business day before the originally specified issue date;

(ii) The aggregate amount can not be changed by more than the

greater of $10 million or ten percent above or below the aggregate

principal amount specified in the initial subscription;

(iii) An interest rate can not be changed to a rate that exceeds

the maximum interest rate in the table that was in effect for a

security of comparable maturity on the date the initial subscription

was submitted under the provisions of Sec. 344.3(b)(1); and

(iv) Where an amendment is not submitted timely, the Division of

Special Investments can determine, pursuant to the provisions governing

waiver of regulations set forth under 31 CFR 306.126, that such an

amendment is acceptable on an exception basis. Where an amendment is

determined acceptable on an exception basis, the amended information

shall be used as the basis for issuing the securities, and an

administrative fee of $100 per subscription will be assessed. This

administrative fee is due on demand as provided for in Sec. 344.1(h).

The Secretary reserves the right to reject amendments which are not

submitted timely.

(4) No initial subscription is required where a final subscription

is received at least five days before the issue date for subscriptions

of $10 million or less and at least seven days before the issue date

for subscriptions of over $10 million. Such final subscription is

treated as the initial subscription for purposes of determining the

applicable interest rate table (see Sec. 344.2(b)), and can be amended

on or before the issue date, subject to the exceptions in paragraph

(b)(3) of this section.

the Bureau of the Public Debt on or before the issue date, but no later

than 3:00 p.m., Eastern time, on the issue date. The final subscription

can be faxed to the Bureau of the Public Debt at (304) 480-6818,

provided the fax is properly identified as a final subscription and is

immediately followed by the submission of the original subscription

form by mail or other carrier. The final subscription must be for a

total principal amount that is no more than the greater of either $10

million or ten percent above or below the aggregate principal amount

specified in the initial subscription. The final subscription, dated

and signed by an official authorized to make the purchase and showing

the Taxpayer Identification Number of the government body, must be

accompanied by a copy of the initial subscription, where applicable.

The various maturities, interest rates, and interest payment dates (in

the case of

[[Page 55696]]

notes and bonds), must be specified in the final subscription, as well

as the title(s) of the designated official(s) authorized to request

early redemption. Final subscriptions submitted for certificates, notes

and bonds must separately itemize securities of each maturity and each

interest rate. The final subscription must contain a statement by the

subscriber that none of the proceeds submitted in payment is derived

(directly or indirectly) from the redemption before maturity of other

securities of the State and Local Government Series subscribed for on

or before December 27, 1976.

Sec. 344.4 Issue date and payment.

(a) General. The subscriber shall fix the issue date of each

security in the initial subscription. The issue date must be a business

day and can not exceed by more than sixty days the date the initial

subscription is received by Public Debt. Full payment for each

subscription must be submitted by the Fedwire funds transfer system

with credit directed to the Treasury's General Account. Full payment

should be submitted by 3:00 p.m., Eastern time, to ensure that

settlement of the securities occurs on the date of issue.

(b) [Reserved].

Sec. 344.5 Redemption.

(a) Redemption before maturity--(1) In general. A security can be

redeemed at the owner's option no earlier than twenty-five days after

the issue date in the case of a certificate of thirty days or more, no

earlier than fifteen days before the scheduled maturity for zero

interest certificates of fifteen to twenty-nine days maturity, and no

earlier than thirty days after the issue date in the case of a note or

bond. Partial redemptions can be requested in any amount; however, an

account balance of less than $1,000 will be redeemed in total.

(2) Notice. Notice of redemption prior to maturity must be

submitted, either on a designated Treasury form or by letter, by the

official(s) authorized to redeem the securities, as shown on the final

subscription form, to the Division of Special Investments, Bureau of

the Public Debt, 200 Third Street, P.O. Box 396, Parkersburg, WV 26102-

0396. The notice must be received by Public Debt no less than ten days

before the requested redemption date, but no more than sixty days

before the requested redemption date. The notice must show the account

number, the maturities of the securities to be redeemed, and the Tax

Identification Number of the government body. A notice of redemption

prior to maturity can not be canceled.

(3) Redemption proceeds--Subscriptions on or after October 28,

1996. For securities subscribed for on or after October 28, 1996, the

amount of the redemption proceeds is calculated as follows:

(i) Interest. If a security is redeemed before maturity on a date

other than a scheduled interest payment date, interest is paid for the

fractional interest period since the last interest payment date.

(ii) Redemption value. The remaining interest and principal

payments are discounted by the current Treasury borrowing rate for the

remaining term to maturity of the security redeemed. This results in a

premium or discount to the government body, depending on whether the

current Treasury borrowing rate is lower or higher than the stated

interest rate of the early-redeemed SLGS security. This does not apply

to SLGS securities subscribed for before October 28, 1996. The term

``current Treasury borrowing rate'' means the applicable rate shown in

the table of maximum interest rates payable on United States Treasury

securities--State and Local Government Series--for the day the request

for early redemption is received by Public Debt, plus five basis

points. There is no market charge for the redemption of zero interest

time deposit securities subscribed for on or after October 28, 1996.

Redemption proceeds in the case of a zero-interest security are a

return of the principal invested. The formulas for calculating the

redemption value under this section, including examples of the

determination of premiums and discounts are set forth in Appendix B of

this Part.

(4) Redemption proceeds--Subscriptions from September 1, 1989,

through October 27, 1996. For securities subscribed for from September

1, 1989, through October 27, 1996, the amount of the redemption

proceeds is calculated as follows:

(i) Interest. If a security is redeemed before maturity on a date

other than a scheduled interest payment date, interest is paid for the

fractional interest period since the last interest payment date.

(ii) Market charge. An amount shall be deducted from the redemption

proceeds in all cases where the current borrowing rate of the

Department of the Treasury for the remaining period to original

maturity of the security prematurely redeemed exceeds the rate of

interest originally fixed for such security. The amount shall be the

present value of the future increased borrowing cost to the Treasury.

The annual increased borrowing cost for each interest period is

determined by multiplying the principal by the difference between the

two rates. For notes and bonds, the increased borrowing cost for each

remaining interest period to original maturity is determined by

dividing the annual cost by two. For certificates, the increased

borrowing cost for the remaining period to original maturity is

determined by multiplying the annual cost by the number of days

remaining until original maturity divided by the number of days in the

calendar year. Present value shall be determined by using the current

Treasury borrowing rate as the discount factor. The term ``current

Treasury borrowing rate'' is determined in section 344.5(a)(3)(ii).

Where redemption is requested on a date less than thirty days before

the original maturity date, such applicable rate is the rate shown for

a security with a maturity of thirty days. The market charge for bonds,

notes, and certificates of indebtedness can be computed by use of the

formulas in Appendix A to this Part.

(5) Redemption proceeds--Subscriptions from December 28, 1976,

through August 31, 1989. For securities subscribed for from December

28, 1976, through August 31, 1989, the amount of the redemption

proceeds is calculated as follows:

(i) Interest. Interest for the entire period the security was

outstanding shall be recalculated on the basis of the lesser of the

original interest rate at which the security was issued, or the

interest rate that would have been set at the time of the initial

subscription had the term for the security been for the shorter period.

If a note or bond is redeemed before maturity on a date other than a

scheduled interest payment date, no interest is paid for the fractional

interest period since the last interest payment date.

(ii) Overpayment of interest. If there have been overpayments of

interest, as determined under paragraph (a)(5)(i) of this section,

there shall be deducted from the redemption proceeds the aggregate

amount of such overpayments, plus interest, compounded semi-annually

thereon, from the date of each overpayment to the date of redemption.

The interest rate used used in calculating the interest on the

overpayment shall be one-eighth of one percent above the maximum rate

that would have applied to the initial subscription had the term of the

security been for the shorter period.

(iii) Market charge. An amount shall be deducted from the

redemption proceeds in all cases where the current borrowing rate of

the Department of the Treasury for the remaining period to original

maturity of the security

[[Page 55697]]

prematurely redeemed exceeds the rate of interest originally fixed for

such security. The amount shall be calculated using the formula in

paragraph (a)(3)(ii) of this section.

(6) Redemption proceeds--Subscriptions on or before December 27,

1976. For securities subscribed for on or before December 27, 1976, the

amount of the redemption proceeds is calculated as follows.

(i) The interest for the entire period the security was outstanding

shall be re-calculated on the basis of the lesser of the original

interest rate at which the security was issued, or an adjusted interest

rate reflecting both the shorter period during which the security was

actually outstanding and a penalty. The adjusted interest rate is the

Treasury rate which would have been in effect on the date of issuance

for a marketable Treasury certificate, note, or bond maturing on the

quarterly maturity date prior to redemption (in the case of

certificates), or on the semi-annual maturity period prior to

redemption (in the case of notes and bonds), reduced in either case by

a penalty which shall be the lesser of:

(A) One-eighth of one percent times the number of months from the

date of issuance to original maturity, divided by the number of full

months elapsed from the date of issue to redemption; or

(B) One-fourth of one percent.

(ii) There shall be deducted from the redemption proceeds, if

necessary, any overpayment of interest resulting from previous payments

made at a higher rate based on the original longer period to maturity.

(b) [Reserved]

Subpart C--Demand Deposit Securities

Sec. 344.6 Description of securities.

(a) Terms. The securities are one-day certificates of indebtedness.

Each subscription is established as a unique account. Securities are

automatically rolled over each day unless redemption is requested.

(b) Interest rate.

(1) Each security shall bear a variable rate of interest based on

an adjustment of the average yield for three-month Treasury bills at

the most recent auction. A new rate is effective on the first business

day following the regular auction of three-month Treasury bills and is

shown in the SLGS rate table, available to the public on such business

day. Interest is accrued and added to principal daily. Interest is

computed on the balance of the principal, plus interest accrued through

the preceding day.

(2)(i) The annualized effective demand deposit rate in decimals,

designated ``I'' in Equation 1 is calculated as:

[GRAPHIC] [TIFF OMITTED] TR28OC96.000

where

P=Average auction price for the most recently auctioned 13-week

Treasury bill, per hundred, to three decimals.

Y=365 if the year following issue date does not contain a leap year day

and 366 if it does contain a leap year day.

DTM=The number of days from date of issue to maturity for the most

recently auctioned 13-week Treasury bill.

MTR=Estimated marginal tax rate, in decimals, of purchasers of tax-

exempt bonds.

TAC=Treasury administrative costs, in decimals.

(ii) The daily factor for the demand deposit rate is then

calculated as follows:

[GRAPHIC] [TIFF OMITTED] TR28OC96.001

(3) Information on the estimated average marginal tax rate and

costs for administering the demand deposit State and Local Government

Series securities program, both to be determined by Treasury from time

to time, will be published in the Federal Register.

principal and is reinvested daily until redemption. At any time the

Secretary determines that issuance of obligations sufficient to conduct

the orderly financing operations of the United States cannot be made

without exceeding the statutory debt limit, the Department will invest

any unredeemed demand deposit securities in special ninety-day

certificates of indebtedness. These ninety-day certificates are payable

at maturity, but redeemable before maturity, provided funds are

available for redemption, or reinvested in demand deposit securities

when regular Treasury borrowing operations resume, both at the owner's

option. Funds invested in the ninety-day certificates of indebtedness

earn simple interest equal to the daily factor in effect at the time

demand deposit security issuance is suspended, multiplied by the number

of days outstanding.

Sec. 344.7 Subscription for purchase.

(a) Subscription requirements. Subscriptions for purchase of

securities under this offering must be submitted to the Division of

Special Investments, Bureau of the Public Debt, 200 Third Street, P.O.

Box 396, Parkersburg, WV 26102-0396. Subscriptions must be submitted on

a designated Treasury form, must specify the principal amount invested

and the issue date, and must be signed by an official authorized to

make the purchase. The Bureau of the Public Debt must receive the

subscription at least five days before the issue date for subscriptions

of $10 million or less and at least seven days before the issue date

for subscriptions of more than $10 million. Subscriptions for $10

million or less can be canceled without penalty up to five days prior

to the issue date. Subscriptions for more than $10 million can be

canceled without penalty up to seven days prior to the issue date. The

subscription can be submitted by fax at (304) 480-6818, by certified or

registered mail, or by other carrier. If faxed, the original

subscription form must be received by the Division of Special

Investments by 3:00 p.m., Eastern time, on the issue date. Public Debt

will not accept subscriptions for demand deposit securities more than

60 days prior to the issue date.

(b) Amending subscriptions. The principal amount to be invested can

be changed without penalty on or before the issue date, but no later

than 1:00 p.m. Eastern time, on the issue date. The request must be

clearly identified as an amendment and must be followed immediately by

the submission, by mail or other carrier, of written notification.

Where an amendment is not submitted timely, the Division of Special

Investments can determine, pursuant to the provisions governing waiver

[[Page 55698]]

regulations set forth under 31 CFR 306.126, that such an amendment is

acceptable on an exception basis. Where an amendment is determined

acceptable on an exception basis, the amended information shall be used

as the basis for issuing the securities, and an administrative fee of

$100 per subscription is then assessed. This administrative fee is due

on demand as provided for in Sec. 344.1(h). The Secretary reserves the

right to reject amendments which are not submitted timely.

Sec. 344.8 Issue date and payment.

The subscriber shall fix the issue date on the subscription at

least five days after receipt of the subscription by the Division of

Special Investments for subscriptions of $10 million or less and seven

days after receipt of the subscription by the Division of Special

Investments for subscriptions of more than $10 million. Full payment

for each subscription must be submitted by the Fedwire funds transfer

system with credit directed to the Treasury's General Account. Full

payment should be received by the Division of Special Investments by

3:00 p.m., Eastern time, to ensure that settlement on the securities

occurs on the issue date.

Sec. 344.9 Redemption.

(a) General. A security can be redeemed at the owner's option,

provided a request for redemption is received not less than one

business day prior to the requested redemption date for redemptions of

$10 million or less and received not less than three business days for

redemptions of more than $10 million. Partial redemptions can be

requested in any amount; however, an account balance of less than

$1,000 is redeemed in total. Payment is made by Fedwire.

(b) Notice. Notice of redemption must be submitted, either on a

designated Treasury form or by letter, by the official(s) authorized to

redeem the securities, as shown on the subscription form, to the

Division of Special Investments, Bureau of the Public Debt, 200 Third

Street, P.O. Box 396, Parkersburg, WV 26102-0396. The notice can be

submitted by fax to the Bureau of the Public Debt at (304) 480-6818, by

mail, or by other carrier. The notice must show the account number and

the Tax Identification Number of the government body. The notice of

redemption must be received at the Bureau of the Public Debt by 1:00

p.m., Eastern time on the required day.

Subpart D--Special Zero Interest Securities

Sec. 344.10 General.

Provisions of subpart B of this Part (Time Deposit Securities)

apply except as specified in subpart D of this Part. Special zero

interest securities can not be subscribed for after October 28, 1996.

All zero interest securities subscribed for after October 28, 1996 will

be zero interest time deposit securities, subject to the rules of

subpart B of this Part.

Sec. 344.11 Redemption.

(a) Before maturity. Provisions of Section 344.5(a) apply. In

general, a security can be redeemed at the owner's option no earlier

than twenty-five days after the issue date in the case of a certificate

and one year after the issue date in the case of a note. No market

charge or penalty shall apply in the case of the redemption of a

special zero interest security before maturity.

(b) Notice. Notice of redemption prior to maturity must be

submitted, either on a designated Treasury form or by letter, by the

official(s) authorized to redeem the securities, as shown on the final

subscription form, to the Division of Special Investments, Bureau of

the Public Debt, 200 Third Street, P.O. Box 396, Parkersburg, WV 26102-

0396. The notice can be submitted by fax to the Bureau of the Public

Debt at (304) 480-6818, by mail, or by other carrier. The notice must

show the account number, the maturities of the securities to be

redeemed, and the Tax Identification Number of the government body. The

notice must be received by Public Debt no less than ten days before the

requested redemption date, but no more than sixty days before the

requested redemption date. A notice of redemption prior to maturity

cannot be canceled.

Appendix A to Part 344--Early Redemption Market Charge Formulas and

Examples for Subscriptions From September 1, 1989, Through October

27, 1996

A. The amount of the market charge for bonds and notes subscribed

for before October 28, 1996 can be determined by the following formula:

[GRAPHIC] [TIFF OMITTED] TR28OC96.002

where:

M=Market charge

b=increased annual borrowing cost (i.e., principal multiplied by the

excess current borrowing rate for the period from redemption to

original maturity of note or bond over the rate for the security)

r=number of days from redemption date to next interest payment date

s=number of days in current semi-annual period

i=Treasury borrowing rate over the remaining term to maturity, based on

semi-annual interest payments and expressed in decimals.

n=number of remaining full semi-annual periods from the redemption date

to the original maturity date, except that if the redemption date is on

an interest payment date, n will be one less than the number of full

semi-annual periods remaining to maturity.

vn=1/(1 + i/2)n=present value of 1 due at the end of n

periods (Equation 2)

aa = (1-vn)/(i/2) = v + v2 + v3 + ... + vn =

present value of 1 per period for n periods (Equation 3)

B. The application of this formula can be illustrated by the

following example:

(1) Assume that a $600,000 note is issued on July 1, 1985, to

mature on July 1, 1995. Interest is payable at a rate of 8% on January

1 and July 1.

(2) Assume that the note is redeemed on February 1, 1989, and that

the current borrowing rate for Treasury at that time for the remaining

period of 6 years and 150 days is 11%.

(3) The increased annual borrowing cost is $18,000.

($600,000) x (11%-8%)

(4) The market charge is computed as follows:

[[Page 55699]]

[GRAPHIC] [TIFF OMITTED] TR28OC96.003

[GRAPHIC] [TIFF OMITTED] TR28OC96.004

C. The amount of the market charge for certificates subscribed for

before October 28, 1996 can be determined through use of the following

formula:

[GRAPHIC] [TIFF OMITTED] TR28OC96.005

where

M=market charge

b=increased borrowing cost for full period

r=number of days from redemption date to original maturity date

s=number of days in current annual period (365 or 366)

i=current borrowing rate expressed in decimals (discount factor)

D. The application of this formula can be illustrated by the

following example:

(1) Assume that a $50,000 certificate is issued on March 1, 1987,

to mature on November 1, 1987. Interest is payable at a rate of 10%.

(2) Assume that the certificate is redeemed on July 1, 1987, and

that the current borrowing cost to Treasury for the 123-day period from

July 1, 1987, to November 1, 1987, is 11.8%.

(3) The increased annual borrowing cost is $900. ($50,000) x

(11.8%-10%)

(4) The market charge is computed as follows:

[[Page 55700]]

[GRAPHIC] [TIFF OMITTED] TR28OC96.006

Appendix B to Part 344--Formula for Determining Redemption Value

for Securities Subscribed for and Early-Redeemed on or After

October 28, 1996

This results in a premium or discount to the government body,

depending on whether the current Treasury borrowing rate at the time of

early redemption is lower or higher than the stated interest rate of

the early-redeemed SLGS security.

A. The total redemption value for bonds and notes can be determined

by the following two steps:

First, accrued interest payable in accordance with

Sec. 344.5(a)(3)(i) is calculated using the following formula:

[GRAPHIC] [TIFF OMITTED] TR28OC96.007

where

RV=Redemption value

F=Face amount redeemed

AI=Accrued interest=[(s-r)/s] x (C/2)

r=Number of days from redemption date to next interest payment date

s=number of days in current semi-annual period

i=Treasury borrowing rate over the remaining term to maturity, based on

semi-annual interest payments and expressed in decimals

C=the regular annual interest

n=number of remaining full semi-annual periods from the redemption date

to the original maturity date, except that, if the redemption date is

an interest payment date, n will be one less than the number of full

semi-annual periods remaining to maturity

vn=1/(1+i/2) n=present value of 1 due at the end of n periods

aa=(1-vn)/(i/2)=v + v2 + v3 + ... + vn =

present value of 1 per period for n periods

B. The application of this formula can be illustrated by the

following examples:

(i) The first example is for a redemption at a premium.

(1) Assume that an $800,000 2-year note is issued on December 10,

1996, to mature on December 10, 1998. Interest is payable at a rate of

7% on June 10 and December 10.

(2) Assume that the note is redeemed on October 21, 1997, and that

the current borrowing rate for Treasury at that time for the remaining

period of 1 year and 50 days is 6.25%.

(3) The redemption value is computed as follows:

First, the accrued interest payable is calculated as:

[[Page 55701]]

[GRAPHIC] [TIFF OMITTED] TR28OC96.010

[[Page 55702]]

[GRAPHIC] [TIFF OMITTED] TR28OC96.012

(ii) The second example is for a redemption at a discount and it

uses the same assumptions as the first example, except the current

Treasury borrowing cost is assumed to be 8.00%:

(1) Assume that an $800,000 2-year note is issued on December 10,

1996, to mature on December 10, 1998. Interest is payable at a rate of

7% on June 10 and December 10.

(2) Assume that the note is redeemed on October 21, 1997, and that

the current borrowing rate for Treasury at that time for the remaining

period of 1 year and 50 days is 8.00%.

(3) The redemption value is computed as follows. First, the accrued

interest payable is caculated as:

[[Page 55703]]

[GRAPHIC] [TIFF OMITTED] TR28OC96.013

[[Page 55704]]

[GRAPHIC] [TIFF OMITTED] TR28OC96.015

C. The total redemption value for certificates can be determined by

the following two steps:

First, accrued interest payable in accordance with Section

344.5(a)(3)(i) is calculated using the following formula:

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where:

RV=Redemption value

F=Face amount redeemed

AI=Accrued interest = [(d-r)/y] x C

d=Number of days from original issue of the certificate to its maturity

date

r=Number of days from redemption date to the certificate's maturity

date

y=365, if the number of days in the year following issue of the

certificate does not include a leap year day; 366, if the number of

days following issue of the certificate does include a leap year day

i=Treasury borrowing rate over the remaining term to maturity,

expressed in decimals

C=the regular annual interest

D. The application of this formula can be illustrated by the

following examples.

(i) First, for a redemption at a premium:

(1) Assume that a $300,000 security is issued on December 5, 1996,

to mature in 151 days on May 5, 1997. Interest at a rate of 5% is

payable at maturity.

(2) Assume that the security is redeemed on April 9, 1997, and that

the current borrowing rate for Treasury at that time for the remaining

period of 26 days is 4.00%.

(3) The redemption value is computed as follows. First, the accrued

interest payable is calculated as:

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(ii) Secondly, for a redemption at a discount:

(1) Assume that a $300,000 security is issued on December 5, 1996,

to mature in 151 days on May 5, 1997. Interest at a rate of 5% is

payable at maturity.

(2) Assume that the security is redeemed on April 9, 1997, and that

the current borrowing rate for Treasury at that time for the remaining

period of 26 days is 6.25%.

(3) The redemption value is computed as follows. First, the accrued

interest payable is calculated as:

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[FR Doc. 96-27365 Filed 10-21-96; 4:58 pm]

BILLING CODE 4810-39-W

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.