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

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

[email protected]. 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.1

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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,2 whose principal value is adjusted for inflation

as measured by the United States Government.3 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.4

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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,5 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.6 Each inflation-indexed security has a unique

reference CPI value applicable to the security's original issue

date.7 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.''8 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.9

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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

10 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 $1,000.11

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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.12 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 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 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

CPIIssue 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.

Definitions

C=3.50%

Par=$1,000,000

Ref CPIIssue Date=174.62783

Ref CPIDate=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