[Federal Register Volume 62, Number 85 (Friday, May 2, 1997)]
[Rules and Regulations]
[Pages 24280-24283]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-11382]


      

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Part V





Department of the Treasury





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Fiscal Service



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31 CFR Part 351



Offering of United States Savings Bonds, Series EE; Final Rule

  Federal Register / Vol. 62, No. 85 / Friday, May 2, 1997 / Rules and 
Regulations  

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DEPARTMENT OF THE TREASURY

Fiscal Service

31 CFR Part 351

[Department of the Treasury Circular, Public Debt Series No. 1-80]


Offering of United States Savings Bonds, Series EE

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

ACTION: Final rule.

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SUMMARY: This final rule amends the offering circular for Series EE 
United States Savings Bonds to change the rate structure for Series EE 
United States Savings Bonds with issue dates of May 1, 1997, or 
thereafter. The purpose of these changes is to simplify the rate 
structure for Series EE United States Savings Bonds.

EFFECTIVE DATE: May 1, 1997.

FOR FURTHER INFORMATION CONTACT: Wallace Earnest, Director, Division of 
Staff Services, Savings Bond Operations Office, Bureau of the Public 
Debt, Parkersburg, West Virginia 26106-1328, (304) 480-6319 or through 
the Internet at [email protected]; or Ed Gronseth, Deputy Chief 
Counsel, Office of the Chief Counsel, Bureau of the Public Debt, 
Parkersburg, West Virginia 26106-1328, (304) 480-5192 or through the 
Internet at [email protected]; or Bob Riffle, Attorney-Adviser, 
Office of the Chief Counsel, Bureau of the Public Debt, Parkersburg, 
West Virginia 26106-1328, (304) 480-5192 or through the Internet at 
[email protected]. Copies of this amendment can be downloaded from 
the Internet at the following address: http://www.publicdebt.treas.gov.

SUPPLEMENTARY INFORMATION:

1. Background

    In 1995, Treasury published a new rate structure for Series EE 
savings bonds with issue dates of May 1995 or thereafter. That rate 
structure simplified market-based rates and, among other things, 
eliminated minimum yields (except that redemption values at the date of 
original maturity--17 years after the date of issue--are not less than 
the face amount). Based on experience since May 1995, Treasury has 
determined that it is appropriate to simplify the program further, and 
to change the rate structure to make savings bonds with issue dates of 
May 1, 1997, or thereafter, more attractive to savers. These changes 
include: (1) a rate structure based on 90% of the average of the 5-year 
Treasury securities yields from the date of issue through original 
maturity (17 years from the date of issue) and through the final 
maturity period (17 years to 30 years from the date of issue) unless 
the terms and conditions applicable to a final maturity period are 
expressly amended prior to the beginning of such period; (2) a 3-month 
interest penalty for bonds redeemed prior to five years from the date 
of issue; and (3) monthly increases in redemption values beginning with 
the fourth month from the date of issue (due to the 3-month interest 
penalty) through original maturity (17 years from the date of issue) 
and through the final maturity period (17 years to 30 years from the 
date of issue) unless the terms and conditions applicable to a final 
maturity period are expressly amended prior to the beginning of such 
period.
    Currently, the interest rate on savings bonds for the first five 
years is 85 percent of the average of 6-month Treasury securities 
yields (see 31 CFR 351.2(j)(1)(ii) for information on how the short-
term rate is determined); and, for holding periods beyond the first 
five years, the rate is 85 percent of the average of the 5-year 
Treasury securities yields (see 31 CFR 351.2(j)(1)(iii) for information 
on how the long-term rate is determined). This final rule provides a 
new rate structure for Series EE savings bonds issued May 1, 1997, or 
thereafter. The new rates are 90 percent of the average of 5-year 
Treasury securities yields from the date of issue through original 
maturity (17 years from the date of issue).
    This final rule includes a 3-month interest penalty for early 
redemptions to encourage owners to hold their bonds for the longer 
term. This penalty applies only to owners that redeem their bonds prior 
to 5 years after the date of issue and would not affect those who hold 
bonds for 5 years or more. Like other Series EE savings bonds, savings 
bonds issued May 1, 1997, or thereafter, may be redeemed after six 
months from the date of issue (31 CFR 351.2(d)); however, the 3-month 
interest penalty would apply if redeemed prior to 5 years from the date 
of issue. Redemption values published in tables reflect the 3-month 
interest penalty for redemptions, if the bonds are redeemed prior to 5 
years after the date of issue.
    The third feature of the new savings bonds rate structure is the 
monthly accrual of interest. The new rate structure, taking into 
account the 3-month interest penalty, provides owners with increases in 
value every month beginning with the fourth month from the date of 
issue through original maturity. This contrasts with savings bonds, 
described in 31 CFR 351.2(h), issued March 1, 1993, through April 1, 
1995, in which the redemption values increase on the first day of each 
month from the third through the sixtieth month after issue, and 
thereafter either on the first day of each month or on the first day of 
each successive 6-month period, whichever accrual schedule ensures that 
the actual yield from issue date to redemption date is in no case less 
than 4 percent per annum, compounded semiannually.
    No changes are being made to the terms and conditions for 
outstanding Series EE savings bonds with issue dates prior to May 1, 
1997, or to the regulations governing the offering of savings notes or 
Series E, H, and HH savings bonds in 31 CFR Parts 316, 332, and 352.

II. Summary of Amendments

    Section 351.0 is being amended to change the effective date of the 
offering circular to May 1, 1997.
    Section 351.2 is being amended to limit the applicability of 
paragraph (j) to Series EE savings bonds with May 1995 through April 
1997 issue dates.
    A new paragraph (k) is added to Section 351.2 to describe terms and 
conditions for Series EE savings bonds offered for sale on and after 
May 1, 1997. Paragraph (k) sets forth definitions applied in the 
determination of values for Series EE savings bonds issued May 1, 1997, 
or thereafter. The definitions for market yields, base denominations, 
issue dates, original maturity, and final maturity parallel definitions 
used in previous offerings of savings bonds (see similar definitions in 
paragraph (j) for bonds issued May, 1995, through April 1997). In 
addition, paragraph (k)(1) contains three new definitions:

    Savings bonds rate. Paragraph (k)(1)(ii) sets forth the 
definition of savings bonds rate. To determine this rate, Treasury 
compiles 5-year Treasury securities yields as of the close of 
business for each day of the previous six months and calculates the 
monthly average to the nearest one-hundredth of one percent. The 
savings bonds rate is then determined by taking 90 percent of the 6-
month average and rounding the result to the nearest one-hundredth 
of one percent.
    Accrual dates. Paragraph (k)(1)(v) sets forth the definition of 
accrual dates. Interest on a Series EE savings bond accrues on the 
first day of each month beginning with the fourth month from the 
date of issue. The redemption value of a bond does not change 
between these accrual dates.
    Semiannual Rate Periods. Paragraph (k)(1)(vi) describes the 6-
month time periods between the semiannual anniversaries of the date 
of issue running through original maturity (17 years from the date 
of issue).

    Paragraph (k)(2) sets out an explanation of interest rates and

[[Page 24281]]

monthly accruals for savings bonds with issue dates of May 1, 1997, or 
thereafter. Savings bonds rates are defined in paragraph (k)(1)(ii). 
This paragraph explains how the savings bonds rates for Series EE 
savings bonds are determined during the first semiannual rate period 
beginning on or after the effective date of the rate.
    Interest is credited on the first day of each month and compounded 
semiannually. Interest accrues beginning with the fourth month from the 
date of issue. For example, a bond issued in January has interest first 
credited on May 1, which represents one month of interest because of 
the 3-month interest penalty. A table provided in paragraph (k)(2) 
shows, for any given month of issue with rates announced each May and 
November, the months making up the semiannual rate period during which 
interest is earned at the announced rate (disregarding the penalty for 
bonds redeemed prior to 5 years after the date of issue) and the months 
in which the bonds increase in value. This rate is an annual rate 
compounded semiannually.
    Paragraph (k)(3) describes a 3-month interest penalty that is 
applied to bonds issued May 1, 1997, or thereafter that are redeemed 
prior to 5 years following the date of issue. The overall earning 
period for these bonds is reduced and the redemption values of such 
bonds will reflect the 3-month interest penalty. For example, if a bond 
is redeemed 9 months after the date of issue, the redemption value will 
be determined by applying the redemption value calculation formula 
described in paragraph (k)(4) and the savings bonds rate for that bond 
at 6 months after the date of issue. The redemption value of a bond 
subject to the 3-month interest penalty shall not be reduced below the 
issue price. This penalty does not apply to bonds redeemed 5 years or 
more after the date of issue.
    Paragraph (k)(4) sets out the formula and definitions for 
calculation of the redemption value of savings bonds issued May 1, 
1997, or thereafter. An example is provided to help explain the 
redemption value calculations.
    Paragraph (k)(5) sets forth how interest rates will be applied 
during extended maturity periods. From 17 years after date of issue to 
the final maturity date (30 years after the date of issue), the bond 
continues to earn interest as described in paragraph (k)(2) unless the 
terms and conditions applicable to a final maturity period are 
expressly amended prior to the beginning of such period.
    Paragraph (k)(6) sets out the finality of the Secretary's 
determination of market yields, savings bonds rates, extended maturity 
period rates and redemption values.
    Paragraph (k)(7) sets out the availability of redemption tables and 
states that redemption values reflect penalties for early redemptions, 
where applicable because bonds are held less than 5 years after the 
date of issue.
    Section 351.9 is being revised by replacing the current description 
of the savings bonds education feature with a brief paragraph that 
refers the reader to authoritative IRS publications.
    The heading of Table 3 appended to 31 CFR Part 351 is amended to 
replace the March 1, 1993, date with March 1, 1993, through April 1, 
1995.

Procedural Requirements

    It has been determined that 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 rule relates to matters of public contract. The notice and 
public procedures requirements of the Administrative Procedure Act are 
inapplicable, pursuant to 5 U.S.C. 553(a)(2). As 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 are no collections of information required by this Final 
Rule, and, therefore, no approval pursuant to the Paperwork Reduction 
Act, is required.

List of Subjects in 31 CFR Part 351

    Bonds, Government Securities.

    Dated: April 28, 1997.
Gerald Murphy,
Fiscal Assistant Secretary.

    For the reasons set forth above, Part 351 of Title 31, Chapter II 
of the Code of Federal Regulations is amended as follows:

PART 351--OFFERING OF UNITED STATES SAVINGS BONDS, SERIES EE

    1. The authority citation for Part 351 continues to read as 
follows:

    Authority: 5 U.S.C. 301; 12 U.S.C. 391; 31 U.S.C. 3105.


Sec. 351.0  [Amended]

    2. Section 351.0 is amended, in the second sentence, by removing 
``May 1, 1995'', and adding in its place ``May 1, 1997''.


Sec. 351.2  [Amended]

    3. Section 351.2 is amended as follows:
    A. In paragraph (j), the heading is amended by removing the words 
``May 1, 1995, or thereafter'' and adding in its place ``May 1, 1995, 
through April 1, 1997'';
    B. In paragraph (j)(1), the introductory text is amended by 
removing the words ``May 1, 1995, and thereafter'' and adding in its 
place ``May 1, 1995, through April 1, 1997'';
    C. Paragraph (j)(1)(vi) is amended by removing the words ``May 1, 
1995, and thereafter'' and adding in its place ``May 1, 1995, through 
April 1, 1997'';
    D. Paragraph (j)(2) is amended by removing the words ``May 1, 1995, 
or thereafter'' and adding in its place ``May 1, 1995, through April 1, 
1997'';
    E. Paragraph (j)(3) is amended by removing the words ``May 1, 1995, 
or thereafter'' and adding in its place ``May 1, 1995, through April 1, 
1997''.
    F. A new paragraph (k) is added to Sec. 351.2 to read as follows:


Sec. 351.2  Description of bonds.

* * * * *
    (k) Interest rate and redemption values--bonds bearing issue dates 
of May 1, 1997, or thereafter.
    (1) The following definitions apply for determining the interest 
rates and redemption values for bonds bearing issue dates of May 1, 
1997, or thereafter:
    (i) Market yields. Treasury uses market bid yields for bills, 
notes, and bonds to create a yield curve based on the most actively 
traded Treasury securities. This curve relates the yield on a security 
to its time to maturity. Yields at particular points on the curve are 
referred to as ``constant maturity yields'' and are determined by the 
Treasury from this daily yield curve. The 5-year Treasury securities 
yields described below are derived from these yield curves.
    (ii) Savings bonds rate. No less frequently than on each May 1 and 
November 1, Treasury announces a variable market-based savings bonds 
rate. To determine this rate, Treasury compiles 5-year Treasury 
securities yields as of the close of business for each day of the 
previous six months and calculates the monthly average to the nearest 
one-hundredth of one percent. The savings bonds rate is then determined 
by taking 90 percent of the 6-month average and rounding the result to 
the nearest one-hundredth of one percent. If the regularly scheduled 
date for the announcement (for example, May 1) is a day when the 
Treasury is not open for business, then the announcement is made on the 
next business day, however, the effective date of the rate remains the 
first day of the month of the announcement.

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    (iii) Base denomination. All redemption value calculations are 
performed on a hypothetical denomination of $25 having a value at the 
beginning of the first semiannual rate period equal to an issue price 
of $12.50. Redemption values for bonds of greater denominations are in 
direct proportion according to the ratio of denominations.
    (iv) Issue date. The issue date of a Series EE savings bond is the 
first day of the month in which payment of the issue price is received 
by an authorized issuing agent.
    (v) Accrual date. Interest on a Series EE savings bond accrues on 
the first day of each month beginning with the fourth month from the 
date of issue. The redemption value of a bond does not change between 
these accrual dates.
    (vi) Semiannual Rate Periods. Semiannual rate periods are the 6-
month periods beginning on the date of issue and on each semiannual 
anniversary of the date of issue to original maturity.
    (vii) Original maturity. Bonds reach original maturity at 17 years 
after date of issue.
    (viii) Final maturity. Bonds reach final maturity at 30 years after 
the date of issue. Bonds cease to earn interest at final maturity.
    (2) Interest rates and monthly accruals for bonds with issue dates 
of May 1, 1997, or thereafter, through original maturity. Savings bonds 
rates defined in paragraph (k)(1)(ii) of this section apply to earnings 
during the first semiannual rate period beginning on or after the 
effective date of the rate. Interest is credited on the first day of 
each month and compounded semiannually. Interest accrues beginning with 
the fourth month from the date of issue. For example, a bond issued in 
January has interest first credited on May 1, which represents one 
month of interest because of the 3-month interest penalty. The 
following table shows, for any given month of issue with rates 
announced each May and November, the months making up the semiannual 
rate period during which interest is earned at the announced rate 
(disregarding the penalty for bonds redeemed prior to 5 years after the 
date of issue) and the months in which the bonds increase in value. 
This rate is an annual rate compounded semiannually.

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                                         And rate announcement/effective     Then, semiannual rate periods in which   And bonds increase in value on 1st
          If issue month is:                        date is:                 interest is earned include months of:             day of months of:        
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JAN or JUL...........................  May 1.............................  JUL through DEC..........................  AUG through JAN.                  
FEB or AUG...........................  May 1.............................  AUG through JAN..........................  SEP through FEB.                  
MAR or SEP...........................  May 1.............................  SEP through FEB..........................  OCT through MAR.                  
APR or OCT...........................  May 1.............................  OCT through MAR..........................  NOV through APR.                  
MAY or NOV...........................  May 1.............................  MAY through OCT..........................  JUN through NOV.                  
JUN or DEC...........................  May 1.............................  JUN through NOV..........................  JUL through DEC.                  
JAN or JUL...........................  November 1........................  JAN through JUN..........................  FEB through JUL.                  
FEB or AUG...........................  November 1........................  FEB through JUL..........................  MAR through AUG.                  
MAR or SEP...........................  November 1........................  MAR through AUG..........................  APR through SEP.                  
APR or OCT...........................  November 1........................  APR through SEP..........................  MAY through OCT.                  
MAY or NOV...........................  November 1........................  NOV through APR..........................  DEC through MAY.                  
JUN or DEC...........................  November 1........................  DEC through MAY..........................  JAN through JUN.                  
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    (3) Interest penalty for Series EE bonds with issue dates of May 1, 
1997, or thereafter, redeemed less than 5 years following the issue 
dates. If a Series EE savings bond with an issue date of May 1, 1997, 
or thereafter, is redeemed less than five years following the date of 
issue, the overall earning period from the date of issue will be 
reduced by three months. For example, if a bond issued January 1, 1998, 
is redeemed 9 months later on October 1, 1998, the redemption value 
will be determined by applying the redemption value calculation formula 
described in paragraph (k)(4) of this section and the savings bonds 
rate for that bond at 6 months after the date of issue on July 1, 1998. 
The redemption value of a bond subject to the 3-month interest penalty 
shall not be reduced below the issue price. This penalty does not apply 
to bonds redeemed 5 years or more after the date of issue.
    (4) Redemption value calculations. 
    (i) Interest on a bond accrues and becomes part of the redemption 
value which is paid when the bond is surrendered for payment. The 
redemption value of a bond at original maturity shall not be less than 
the face amount/denomination of the bond.
    (ii)(A) The redemption value of a bond for the accrual date (the 
first day of each month beginning with the fourth month from the date 
of issue) is determined in accordance with this section and the 
following formula:

FV = PV  x  {[1+(i  2)](m ' 6)} where
FV (future value) = redemption value on redemption date rounded to the 
nearest cent.
PV (present value) = redemption value at the beginning of the 
semiannual rate period as defined in paragraph (k)(l)(vi) of this 
section.
i = savings bonds rate as defined in paragraph (k)(1)(ii) of this 
section converted to decimal form by dividing by 100.
m = number of full calendar months outstanding during the semiannual 
rate period.

    (B) The following hypothetical example illustrates how this formula 
is applied:

    Example, assume a hypothetical savings bonds rate of 5.00% 
effective May 1, 2002, for a bond denominated at $25, with an issue 
date of September 1, 1997 and a redemption value of $16.00 as of 
September 1, 2002. The February 1, 2003, redemption value is 
calculated as follows: Bonds issue dated in September have 
semiannual rate periods beginning each March 1 and September 1. The 
first semiannual rate period to begin on or after the effective date 
of the May 1, 2002, rate would be the period beginning September 1, 
2002. PV, the present value, would be the value of the bond at the 
beginning of the semiannual rate period, on September 1, 2002. The 
savings bonds rate of 5.00% converted to a decimal would be 0.05. 
The number of months, m, is 5 since 5 full calendar months 
(September through January) have lapsed since the beginning of the 
rate period. FV is then the result of the formula:

FV = $16.00  x { [1 + (0.05  2)](5 ' 6)} = $16.33 
after rounding to the nearest cent.

    Using the example, the FV of a savings bond with a $50 or larger 
denomination can be determined by applying the appropriate multiple, 
for example: $16.33  x  ($50.00  $25.00) for a bond with a 
$50.00 face amount; or $16.33  x  ($100.00  $25.00) for a 
bond with a $100.00 face amount.

    (5) Interest rates and redemption values for bonds during an 
extended maturity period. From 17 years after date of issue to the 
final maturity date (the ``extended maturity period'') the

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bond will be subject to the terms and conditions in effect when it is 
issued and will continue to earn interest as described in paragraph 
(k)(2) of this section, unless the terms and conditions applicable to 
an extended maturity period are expressly amended prior to the 
beginning of such period.
    (6) The Secretary's determination. The determination by the 
Secretary of the Treasury, or his delegate, of market yields, savings 
bonds rates, rates applicable during any extended maturity period, and 
savings bond redemption values shall be final and conclusive.
    (7) Tables of redemption values. Tables of redemption values are 
made available by the Bureau of the Public Debt, Parkersburg, West 
Virginia 26106-1328. Redemption values published in such tables reflect 
the 3-month interest penalty applied to bonds redeemed prior to 5 years 
from the date of issue.
    4. Section 351.9 is revised as follows:


Sec. 351.9  Education savings bond program.

    A bond owner or coowner may be able to exclude from income for 
Federal income tax purposes all or part of the interest received on the 
redemption of qualified U.S. Savings Bonds during the year if that 
owner or coowner paid qualified higher education expenses during the 
same year and certain other conditions are satisfied. This exclusion is 
known as the Education Savings Bond Program, and authoritative 
information about it can be found in Internal Revenue Service 
Publication 17, ``Your Federal Income Tax'', and Publication 550, 
``Investment Income and Expenses'', available from your District 
Director of the Internal Revenue Service.

Table 3 to Part 351--[Amended]

    5. The heading of Table 3 to Part 351 is amended by removing the 
words ``. . . beginning March 1, 1993'' and adding in its place ``. . . 
March 1, 1993, through April 1, 1995.''

[FR Doc. 97-11382 Filed 4-30-97; 2:30 pm]
BILLING CODE 4810-39-P