[Federal Register Volume 69, Number 144 (Wednesday, July 28, 2004)]
[Rules and Regulations]
[Pages 45202-45224]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-17012]



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Part IV





Department of the Treasury





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Fiscal Service



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31 CFR Part 356



Sale and Issue of Marketable Book-Entry Treasury Bills, Notes, and 
Bonds--Plain Language Uniform Offering Circular; Final Rule

  Federal Register / Vol. 69, No. 144 / Wednesday, July 28, 2004 / 
Rules and Regulations  

[[Page 45202]]


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DEPARTMENT OF THE TREASURY

Fiscal Service

31 CFR Part 356


Sale and Issue of Marketable Book-Entry Treasury Bills, Notes, 
and Bonds--Plain Language Uniform Offering Circular

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

ACTION: Final rule.

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SUMMARY: The Department of the Treasury (``Treasury,'' ``We,'' or 
``Us'') is issuing in final form an amendment to 31 CFR Part 356 
(Uniform Offering Circular for the Sale and Issue of Marketable Book-
Entry Treasury Bills, Notes, and Bonds) by converting it to plain 
language. We are issuing this amendment to make our marketable 
securities auction rules easier to understand. This amendment will also 
make certain minor revisions to better make the auction rules conform 
to current practices.

DATES: Effective July 28, 2004.

ADDRESSES: You may download this final rule from the Bureau of the 
Public Debt's Web site at http://www.publicdebt.treas.gov or http://www.gpoaccess.gov/ecfr. It is also available for public inspection and 
copying at the Treasury Department Library, Room 1428, Main Treasury 
Building, 1500 Pennsylvania Avenue, NW., Washington, DC 20220. To visit 
the library, call (202) 622-0990 for an appointment.

FOR FURTHER INFORMATION CONTACT: Lori Santamorena (Executive Director) 
or Chuck Andreatta (Associate Director), Bureau of the Public Debt, 
Government Securities Regulations Staff, (202) 504-3632 or e-mail us at 
[email protected].

SUPPLEMENTARY INFORMATION: The Uniform Offering Circular (UOC), in 
conjunction with the announcement for each auction, provides the terms 
and conditions for the sale and issuance in an auction to the public of 
marketable Treasury bills, notes and bonds.\1\ We have rewritten the 
UOC in plain language because the wide variety of bidders in our 
securities auctions--broker-dealers, depository institutions, non-
financial firms, individuals, etc.--have widely different levels of 
experience in dealing with federal regulations in general and with 
securities-related concepts and regulations in particular. We also 
believe that better understanding of the auction rules may increase 
direct participation in our auctions and improve the auction process 
overall, resulting in lower borrowing costs.
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    \1\ The Uniform Offering Circular was published as a final rule 
on January 5, 1993 (58 FR 411). The circular, as amended, is 
codified at 31 CFR Part 356.
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    On December 23, 2003, we issued a proposed amendment to the UOC to 
convert it to plain language.\2\ We received one comment on the 
proposed rule, from The Bond Market Association (TBMA), which fully 
supported the proposal.\3\ ``We believe that Treasury has improved the 
UOC and * * * has again demonstrated a strong commitment to continually 
enhance its auction rules, process and procedures,'' the commenter 
said.
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    \2\ 68 FR 74293 (December 23, 2003).
    \3\ The proposed rule and the comment letter, dated February 23, 
2004, are available for downloading from www.publicdebt.treas.gov 
and for inspection and copying at the Treasury Department Library at 
the address provided earlier in this final rule.
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    TBMA also suggested one modification, which was to reinsert the 
definition of ``Delivery and payment agreement'' in the definitions 
section of the UOC.\4\ The term is defined in the current UOC, but was 
inadvertently omitted in the proposed plain-language UOC. We agree with 
this suggestion and have reinserted a definition of ``Delivery and 
payment agreement'' into Sec.  356.2 of the final amendment.
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    \4\ 31 CFR 356.2.
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    We are also making various other definitional changes from the 
proposed amendment in Sec.  356.2. We are expanding the definition of 
``Bidder'' to include the situation where we deem an account controlled 
by an investment adviser to be a bidder when an investment adviser bids 
in the controlled account's name.\5\ We are modifying the definition of 
``Bidder Identification Number'' to clarify that it can apply to 
noncompetitive bidders as well as to competitive bidders. We are also 
modifying the definition of ``Price'' to clarify that the term is 
expressed per 100 dollars of the stated value of a security.
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    \5\ Sec.  365.15 includes the specific provisions of the UOC 
applicable to bidder through investment advisers.
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    In addition, we are adding paragraph (4) to Sec.  356.11(a), which 
discusses bidding requirements. The paragraph makes submitters 
responsible for bids submitted using computer equipment on their 
premises, whether or not such bids are authorized. A paragraph to this 
effect is in the current UOC,\6\ but was inadvertently omitted in the 
proposed plain-language UOC.
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    \6\ 31 CFR 356.11(c)(5) of the current UOC.
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    We are also adding paragraph (4) to Sec.  356.11(c), which 
discusses bidding for securities to be held in the TreasuryDirect 
system. This paragraph provides TreasuryDirect investors the same 
ability as bidders in the commercial book-entry system \7\ to bid by 
telephone in a contingency situation such as power outages.
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    \7\ 31 CFR 356.11(b)(3) of this final rule.
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    The proposed rule amendment \8\ eliminated all references to 
multiple-price auctions since we now use single-price auctions for all 
marketable Treasury securities. Upon further reflection, we are adding 
back the references to multiple-price auctions in Sec.  356.20 of the 
final rule amendment to preserve our flexibility should Treasury ever 
wish to reintroduce multiple-price auctions. Accordingly, we are also 
adding back the defined terms ``Multiple-price auction,'' ``Single-
price auction,'' and ``Weighted average'' to Sec.  356.2, and expanding 
the definition of ``Noncompetitive bid'' to incorporate language that 
was omitted in the proposed amendment.
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    \8\ See supra note 2.
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Procedural Requirements

    This final rule is not a significant regulatory action for purposes 
of Executive Order 12866. Although we issued a proposed rule on 
December 23, 2003, to benefit from public comment, the notice and 
public procedures requirements of the Administrative Procedure Act do 
not apply, under 5 U.S.C. 553(a)(2).
    Since a notice of proposed rulemaking is not required, the 
provisions of the Regulatory Flexibility Act (5 U.S.C. 601 et seq.) do 
not apply.
    The Office of Management and Budget previously approved the 
collections of information in this final amendment in accordance with 
the Paperwork Reduction Act under control number 1535-0112. We are only 
rewriting the UOC in plain language and are not making substantive 
changes to these requirements that would impose additional burdens on 
auction bidders.

List of Subjects in 31 CFR Part 356

    Bonds, Federal Reserve System, Government Securities, Securities.

0
We are revising 31 CFR Part 356 to read 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)

Subpart A--General Information
Sec.

[[Page 45203]]

356.0 What authority does the Treasury have to sell and issue 
securities?
356.1 To which securities does this circular apply?
356.2 What definitions do I need to know to understand this part?
356.3 What is the role of the Federal Reserve Banks in this process?
356.4 What are the book-entry systems in which auctioned Treasury 
securities may be issued?
356.5 What types of securities does the Treasury auction?
Subpart B--Bidding, Certifications, and Payment
356.10 What is the purpose of an auction announcement?
356.11 How are bids submitted in an auction?
356.12 What are the different types of bids and do they have 
specific requirements or restrictions?
356.13 When must I report my net long position and how do I 
calculate it?
356.14 What are the requirements for submitting bids for customers?
356.15 What rules apply to bids submitted by investment advisers?
356.16 Do I have to make any certifications?
356.17 How and when do I pay for securities awarded in an auction?
Subpart C--Determination of Auction Awards; Settlement
356.20 How does the Treasury determine auction awards?
356.21 How are awards at the high yield or discount rate calculated?
356.22 Does the Treasury have any limitations on auction awards?
356.23 How are the auction results announced?
356.24 Will I be notified directly of my awards and, if I am 
submitting bids for others, do I have to provide confirmations?
356.25 How does the settlement process work?
Subpart D--Miscellaneous Provisions
356.30 When does the Treasury pay principal and interest on 
securities?
356.31 How does the STRIPS program work?
356.32 What tax rules apply?
356.33 Does the Treasury have any discretion in the auction process?
356.34 What could happen if someone does not fully comply with the 
auction rules or fails to pay for securities?
356.35 Who approved the information collections?
Appendix A to Part 356--Bidder Categories
Appendix B to Part 356--Formulas and Tables
Appendix C to Part 356--Investment Considerations
Appendix D to Part 356--Description of the Consumer Price Index

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

Subpart A--General Information


Sec.  356.0  What authority does the Treasury have to sell and issue 
securities?

    Chapter 31 of Title 31 of the United States Code authorizes the 
Secretary of the Treasury to issue United States obligations, and to 
offer them for sale with the terms and conditions that the Secretary 
prescribes.


Sec.  356.1  To which securities does this circular apply?

    The provisions in this part, including the appendices, and each 
individual auction announcement govern the sale and issuance of 
marketable Treasury securities issued on or after March 1, 1993. This 
part also governs all securities eligible for the STRIPS (Separate 
Trading of Registered Interest and Principal of Securities) Program 
(See Sec.  356.31.). In addition, these provisions and the auction 
announcements govern any other types of securities we may issue under 
this part.


Sec.  356.2  What definitions do I need to know to understand this 
part?

    Accrued interest means an amount that bidders must pay to us for 
interest income as part of the settlement amount. Accrued interest 
compensates us up front for interest that bidders will be paid but did 
not earn because it is attributable to a period of time prior to the 
issue date. (See Appendix B, section I, paragraph C of this part for 
additional explanation and examples.)
    Adjusted value means, for an interest component stripped from an 
inflation-protected security, an amount derived by:
    (1) Multiplying the semiannual interest rate by the par amount, and 
then
    (2) 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 of 
this part for an example of how to calculate the adjusted value.)
    Auction means a bidding process by which we sell marketable 
Treasury securities to the public.
    Autocharge agreement means an agreement in a format acceptable to 
Treasury between a submitter or clearing corporation and a depository 
institution that authorizes us to:
    (1) Deliver awarded securities to either:
    (i) The book-entry securities account of a designated depository 
institution in the commercial book-entry system, or
    (ii) A TreasuryDirect account, and
    (2) Charge a funds account of a designated depository institution 
for the settlement amount of the securities.
    Bid means an offer to purchase a stated par amount of securities, 
either competitively or noncompetitively, in an auction.
    Bid-to-cover ratio means the total par amount of securities bid for 
in an auction divided by the total par amount of securities awarded. It 
excludes bids by, and awards to, the Federal Reserve for its own 
account.
    Bidder, as further defined in Appendix A, means a person or an 
entity that offers to purchase Treasury securities in an auction either 
directly or through a depository institution or dealer. We may consider 
two or more persons or entities to be one bidder based on their 
relationship or their actions in participating in an auction. We 
consider a controlled account to be a bidder when an investment adviser 
bids in the name of the controlled account (See Sec.  356.15.).
    Bidder Identification Number means a number we assign to each 
institutional submitter and to certain other bidders. We assign such 
numbers either to identify certain bidders or to grant separate bidder 
status to different parts of the same corporate or partnership 
structure.
    Book-entry security means a security that is issued and maintained 
as an accounting entry or electronic record in either the commercial 
book-entry system or in TreasuryDirect. (See Sec.  356.4.)
    Business day means any day on which the Federal Reserve Banks are 
open for business.
    Call means the redemption of a security prior to maturity under the 
terms specified in its auction announcement.
    Clearing corporation means a clearing agency as defined in section 
3 of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(23)). A 
clearing corporation must be registered with the Securities and 
Exchange Commission under section 17A of the Securities Exchange Act of 
1934 and its rules.
    Competitive bid means a bid to purchase a stated par amount of 
securities at a specified yield or discount rate.
    Consumer Price Index (CPI) means the monthly non-seasonally 
adjusted U.S. City Average All Items Consumer Price Index for All Urban 
Consumers, published by the Bureau of Labor Statistics of the 
Department of Labor. We use the CPI as the basis for adjusting the 
principal amounts of inflation-protected securities. (See Appendix D.)

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    Corpus means the principal component of a security that has been 
stripped of its interest components.
    CUSIP number means the unique identifying number assigned to each 
separate security issue and each separate STRIPS component. CUSIP 
numbers are provided by the CUSIP Service Bureau of Standard & Poor's 
Corporation. CUSIP is an acronym for Committee on Uniform Securities 
Identification Procedures.
    Customer means a bidder that directs a depository institution or 
dealer to submit or forward a bid for a specific amount of securities 
in a specific auction on the bidder's behalf. Only depository 
institutions and dealers may submit bids for customers directly to us, 
or forward them to another depository institution or dealer.
    Dated date means the date from which interest accrues for notes and 
bonds. The dated date and issue date are usually the same. In those 
cases where interest begins accruing prior to the issue date, however, 
the dated date will be prior to the issue date. An example is when the 
dated date is a Saturday and the issue date is the following Monday.
    Dealer means an entity that is registered or has given notice of 
its status as a government securities broker or government securities 
dealer under Section 15C(a)(1) of the Securities Exchange Act of 1934.
    Delivery and payment agreement means a written agreement between a 
clearing corporation and a submitter, acknowledged by a Federal Reserve 
Bank, regarding securities awarded to the submitter for its own 
account. It authorizes us to deliver such securities to, and accept 
payment from, a depository institution acting on behalf of the clearing 
corporation under an acknowledged autocharge agreement.
    Depository institution means:
    (1) An entity described in Section 19(b)(1)(A), excluding 
subparagraph (vii), of the Federal Reserve Act (12 U.S.C. 
461(b)(1)(A)).
    (2) Any agency or branch of a foreign bank as defined by the 
International Banking Act of 1978, as amended (12 U.S.C. 3101).
    Discount means the difference between par and the price of the 
security, when the price is less than par. (See Appendix B for formulas 
and examples.)
    Discount amount means the discount divided by 100 and multiplied by 
the par amount. (See Appendix B for formulas and examples.)
    Discount rate means a rate of return, on an annual basis, on bills 
held until they mature. The discount rate is expressed in percentage 
terms and based on a 360-day year. It is also referred to as the ``bank 
discount rate.'' (See Appendix B for formulas and examples.)
    Funds account means a cash account maintained by a depository 
institution at a Federal Reserve Bank.
    Index means the Consumer Price Index.
    Index ratio means, for an inflation-protected security, the 
Reference CPI of a particular date divided by the Reference CPI of the 
original issue date. (When the dated date is different from the 
original issue date, the denominator of the index ratio is the 
Reference CPI of the dated date rather than that of the original issue 
date.)
    Inflation-adjusted principal means, for an inflation-protected 
security, the value of the security derived by multiplying the par 
amount by the applicable index ratio as described in Appendix B, 
section I, paragraph B.
    Interest rate means the annual percentage rate of interest paid on 
the par amount (or the inflation-adjusted principal) of a specific 
issue of notes or bonds. (See Appendix B for methods and examples of 
interest calculations on notes and bonds.)
    Intermediary means a depository institution or dealer that forwards 
bids for customers to another depository institution or dealer. An 
intermediary does not submit bids directly to us.
    Issue date means the date specified in the auction announcement on 
which we issue a security as an obligation of the United States. 
Interest normally begins to accrue on a security's issue date.
    Marketable security means a security that may be bought, sold and 
transferred in the secondary market.
    Maturity date means the date on which a security becomes due and 
payable, and ceases to earn interest. The maturity date is specified in 
the auction announcement.
    Minimum to bid means the smallest amount of a security that may be 
bid for in an auction as stated in the auction announcement.
    Multiple to bid means the smallest additional amount of a security 
that may be bid for in an auction as stated in the auction 
announcement.
    Multiple-price auction means an auction in which each successful 
competitive bidder pays the price equivalent to the yield or rate that 
it bid.
    Noncompetitive bid means, for a single-price auction, a bid to 
purchase a stated par amount of securities at the highest yield or 
discount rate awarded to competitive bidders. For a multiple-price 
auction, a noncompetitive bid means a bid to purchase securities at the 
weighted average yield or discount rate of awards to competitive 
bidders.
    Offering amount means the par amount of securities we are offering 
to the public for purchase in an auction, as specified in the auction 
announcement.
    Par means a price of 100. (See Appendix B.)
    Par amount means the stated value of a security at original 
issuance.
    Person means a natural person.
    Premium means the difference between par and the price of the 
security, when the price is greater than par.
    Premium amount means the premium divided by 100 and multiplied by 
the par amount.
    Price means the price of a security per 100 dollars of its stated 
value as calculated using the formulas in Appendix B.
    Real yield means, for an inflation-protected security, the yield 
based on the payment stream in constant dollars. In other words, the 
real yield is the yield in the absence of inflation.
    Reference CPI (Ref CPI) means, for an inflation-protected security, 
the index number applicable to a given date. (See Appendix B, section 
I, paragraph B.)
    Reopening means the auction of an additional amount of an 
outstanding security.
    Security means a Treasury bill, note, or bond, each as described in 
this part. Security also means any other obligation we issue that is 
subject to this part according to its auction announcement. Security 
includes an interest or principal component under the STRIPS program.
    Settlement means final and complete payment for securities awarded 
in an auction and delivery of those securities.
    Settlement amount means the total of the par amount of securities 
awarded, less any discount amount or plus any premium amount, and plus 
any accrued interest. For inflation-protected securities, the 
settlement amount also includes any inflation adjustment when such 
securities are reopened or when the dated date is different from the 
issue date.
    Single-price auction means an auction in which all successful 
bidders pay the same price regardless of the yields or rates they each 
bid.
    STRIPS (Separate Trading of Registered Interest and Principal of 
Securities) means our program under which eligible securities are 
authorized to be separated into principal and interest components, and 
transferred separately. These components are maintained and transferred 
in the commercial book-entry system.
    Submitter means a person or entity submitting bids directly to us 
for its

[[Page 45205]]

own account, for customer accounts, or both. Only depository 
institutions and dealers are permitted to submit bids for customer 
accounts. We permit investment advisers to submit bids on behalf of 
controlled accounts.
    TINT means an interest component from a stripped security.
    TreasuryDirect[reg] means the TreasuryDirect Book-Entry Securities 
System. (See 31 CFR 357, subpart C.)
    We (or ``us'') means the Secretary of the Treasury and his or her 
delegates, including the Department of the Treasury, Bureau of the 
Public Debt, and their representatives. The term also includes Federal 
Reserve Banks acting as fiscal agents of the United States.
    Weighted-average means the average of the yields or discount rates 
at which we award securities to competitive bidders weighted by the par 
amount of securities allotted at each yield or discount rate.
    Yield means the annualized rate of return to maturity on a fixed-
principal security. Yield is expressed as a percentage. For an 
inflation-protected security, yield means the real yield. Yield is also 
referred to as ``yield to maturity.'' (See Appendix B.)
    You means a prospective bidder in an auction.


Sec.  356.3  What is the role of the Federal Reserve Banks in this 
process?

    The Treasury Department authorizes Federal Reserve Banks, as fiscal 
agents of the United States, to perform all activities necessary to 
carry out the provisions of this part, any auction announcements, and 
applicable regulations.


Sec.  356.4  What are the book-entry systems in which auctioned 
Treasury securities may be issued?

    We issue Treasury marketable securities into either of two book-
entry securities systems--the commercial book-entry system or 
TreasuryDirect. We maintain and transfer securities in these two book-
entry systems at their par amount. For example, par amounts of 
inflation-protected securities do not include adjustments for 
inflation. Securities may be transferred from one system to the other. 
See Department of the Treasury Circular, Public Debt Series No. 2-86, 
as amended (31 CFR Part 357).
    (a) The commercial book-entry system. When depository institutions 
or dealers submit bids for Treasury securities in an auction, 
securities awarded as a result of those bids are generally held in the 
commercial book-entry system. Specifically, we maintain book-entry 
accounts in the National Book-Entry System[reg] (``NBES'') for Federal 
Reserve Banks, depository institutions, and other authorized entities, 
such as government and international agencies and foreign central 
banks. In their accounts, depository institutions maintain securities 
held for their own account and for the accounts of others. The accounts 
held for others include those of other depository institutions and 
dealers, which may, in turn, maintain accounts for others.
    (b) TreasuryDirect. In this system, we maintain the book-entry 
securities of account holders directly on the records of the Bureau of 
the Public Debt, Department of the Treasury. Bids for securities to be 
held in TreasuryDirect are generally submitted directly to us, although 
such bids may also be forwarded to us by a depository institution or 
dealer.


Sec.  356.5  What types of securities does the Treasury auction?

    We offer securities under this part exclusively in book-entry form 
and as direct obligations of the United States issued under Chapter 31 
of Title 31 of the United States Code. The securities are subject to 
the terms and conditions in this part, the regulations governing book-
entry Treasury bills, notes, and bonds (31 CFR Part 357), and the 
auction announcements. When we issue additional securities with the 
same CUSIP number as outstanding securities, we consider them to be the 
same securities as the outstanding securities.
    (a) Treasury bills.
    (1) Are issued at a discount;
    (2) Are redeemed at their par amount at maturity; and
    (3) Have maturities of not more than one year.
    (b) Treasury notes--(1) Treasury fixed-principal\1\ notes.
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    \1\ We use the term ``fixed-principal'' in this part to 
distinguish such securities from ``inflation-protected'' securities. 
We refer to fixed-principal notes and fixed-principal bonds as 
``notes'' and ``bonds'' in official Treasury publications, such as 
auction announcements and auction results press releases, as well as 
in auction systems.
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    (i) Are issued with a stated rate of interest to be applied to the 
par amount;
    (ii) Have interest payable semiannually;
    (iii) Are redeemed at their par amount at maturity;
    (iv) Are sold at discount, par, or premium, depending upon the 
auction results; and
    (v) Have maturities of at least one year, but of not more than ten 
years.
    (2) Treasury inflation-protected notes.
    (i) Are issued with a stated rate of interest to be applied to the 
inflation-adjusted principal on each interest payment date;
    (ii) Have interest payable semiannually;
    (iii) Are redeemed at maturity at their inflation-adjusted 
principal, or at their par amount, whichever is greater;
    (iv) Are sold at discount, par, or premium, depending on the 
auction results (See Appendix B for price and interest payment 
calculations and Appendix C for Investment Considerations.); and
    (v) Have maturities of at least one year, but not more than ten 
years.
    (c) Treasury bonds--(1) Treasury fixed-principal bonds.
    (i) Are issued with a stated rate of interest to be applied to the 
par amount;
    (ii) Have interest payable semiannually;
    (iii) Are redeemed at their par amount at maturity;
    (iv) Are sold at discount, par, or premium, depending on the 
auction results; and
    (v) Have maturities of more than ten years.
    (2) Treasury inflation-protected bonds.
    (i) Are issued with a stated rate of interest to be applied to the 
inflation-adjusted principal on each interest payment date;
    (ii) Have interest payable semiannually;
    (iii) Are redeemed at maturity at their inflation-adjusted 
principal, or at their par amount, whichever is greater;
    (iv) Are sold at discount, par, or premium, depending on the 
auction results; and
    (v) Have maturities of more than ten years. (See Appendix B for 
price and interest payment calculations and Appendix C for Investment 
Considerations.)

Subpart B--Bidding, Certifications, and Payment


Sec.  356.10  What is the purpose of an auction announcement?

    By issuing an auction announcement, we provide public notice of the 
sale of bills, notes, and bonds. The auction announcement lists the 
specifics of each auction, e.g., offering amount, term and type of 
security, CUSIP number, and issue and maturity dates. The auction 
announcement and this part, including the Appendices, specify the terms 
and conditions of sale. If anything in the auction announcement differs 
from this part, the auction announcement will control. If you intend to 
bid, you should read the applicable auction announcement along with 
this part.

[[Page 45206]]

Sec.  356.11  How are bids submitted in an auction?

    (a) General. (1) Bids must be submitted using an approved method, 
which depends on whether you are requesting us to issue the awarded 
securities in the commercial book-entry system or in TreasuryDirect 
(See Sec.  356.4.). The approved submission methods for these 
respective systems are explained in this section. A bidder must provide 
its assigned bidder identification numbers if it has been assigned one. 
We have the option of accepting or rejecting incomplete bids.
    (2) We must receive competitive and noncompetitive bids prior to 
their respective closing times, which are stated in the auction 
announcement. We will not include late bids in the auction. For bids 
other than those submitted on paper forms, our computer time stamp will 
establish the receipt time. You are bound by your bids after the 
closing time.
    (3) We are not responsible for any delays, errors, or omissions. We 
are not responsible for any failures or disruptions of equipment or 
communications facilities used for participating in Treasury auctions.
    (4) Submitters are responsible for bids submitted using computer 
equipment on their premises, whether or not such bids are authorized.
    (b) Commercial book-entry system. (1) If you are a submitter and 
the awarded securities are to be issued in the commercial book-entry 
system, you must submit bids using one of our approved electronic 
methods except for contingency situations.
    (2) You must have an agreement on file with us under which you 
agree to our terms and conditions for access to our system for 
participating in our auctions.
    (3) In contingency situations, such as a power outage, we may 
accept bids by a telephone call to designated Treasury employees if you 
submit them prior to the relevant bidding deadline.
    (c) TreasuryDirect. (1) If you are a submitter and the awarded 
securities are to be issued in TreasuryDirect, you may submit bids by 
using one of our approved methods, e.g., computer, automated telephone 
service, or paper forms. You may also reinvest the proceeds of maturing 
securities into new securities by completing the appropriate 
transaction request on time.
    (2) If you are submitting bids by paper form, you must use forms 
authorized by the Bureau of the Public Debt and provide the requested 
information. We have the option of accepting or rejecting bids on any 
other form. You are responsible for ensuring that we receive bids in 
paper form on time. A competitive bid is on time if we receive it prior 
to the deadline for the receipt of competitive bids. A noncompetitive 
bid is on time if:
    (i) we receive it on or before the issue date, and
    (ii) the envelope it arrived in bears evidence, such as a U.S. 
Postal Service cancellation, that it was mailed prior to the auction 
date.
    (3) If you are submitting a bid by computer or automated telephone 
service you must be an established TreasuryDirect account holder with a 
Taxpayer Identification Number. You may not submit a competitive bid by 
computer or telephone.
    (4) In contingency situations, such as a power outage, we may 
accept bids by a telephone call to designated Treasury employees if you 
submit them prior to the relevant bidding deadline and you are an 
established TreasuryDirect account holder.


Sec.  356.12  What are the different types of bids and do they have 
specific requirements or restrictions?

    (a) General. All bids must state the par amount of securities bid 
for and must equal or exceed the minimum to bid amount stated in the 
auction announcement. Bids in larger amounts must be in the multiple 
stated in the auction announcement.
    (b) Noncompetitive bids--(1) Maximum bid. You may not bid 
noncompetitively for more than $1 million in a bill auction or more 
than $5 million in a note or bond auction. The maximum bid limitation 
does not apply if you are bidding solely through a TreasuryDirect 
reinvestment request. A request for reinvestment of securities maturing 
in TreasuryDirect is a noncompetitive bid.
    (2) Additional restrictions. You may not bid noncompetitively in an 
auction in which you are bidding competitively. You may not bid 
noncompetitively if, in the security being auctioned, you hold a 
position in when-issued trading or in futures or forward contracts at 
any time between the date of the auction announcement and the time we 
announce the auction results. During this same timeframe, a 
noncompetitive bidder may not enter into any agreement to purchase or 
sell or otherwise dispose of the securities it is acquiring in the 
auction. For this paragraph, futures contracts include those:
    (i) That require delivery of the specific security being auctioned;
    (ii) For which the security being auctioned is one of several 
securities that may be delivered; or
    (iii) That are cash-settled.
    (c) Competitive bids.
    (1) Bid format--(i) Treasury bills. A competitive bid must show the 
discount rate bid, expressed with three decimals in .005 percent 
increments. The third decimal must be either a zero or a five, for 
example, 5.320 or 5.325.
    (ii) Treasury fixed-principal securities. A competitive bid must 
show the yield bid, expressed with three decimals, for example, 4.170.
    (iii) Treasury inflation-protected securities. A competitive bid 
must show the real yield bid, expressed with three decimals, for 
example, 3.070.
    (2) Maximum recognized bid. There is no limit on the maximum dollar 
amount that you may bid for competitively, either at a single yield or 
discount rate, or at different yields or discount rates. However, a 
competitive bid at a single yield or discount rate that exceeds 35 
percent of the offering amount will be reduced to that amount. For 
example, if the offering amount is $10 billion, the maximum bid amount 
we will recognize at any one yield or discount rate from any bidder is 
$3.5 billion. (See Sec.  356.22 for award limitations.)
    (3) Additional restriction. You may not bid competitively in an 
auction in which you are bidding noncompetitively.


Sec.  356.13  When must I report my net long position and how do I 
calculate it?

    (a) Net long position reporting threshold. (1) If you are bidding 
competitively in an auction, you must report your net long position 
when the total of your bids plus your net long position in the security 
being auctioned equals or exceeds the net long position reporting 
threshold (See table.). We will specify this threshold in the auction 
announcement for each security (See Sec.  356.10.). The threshold is 
typically 35 percent of the offering amount, but we may state a 
different threshold in the auction announcement. To see whether you 
must report your net long position, follow this table:

[[Page 45207]]



------------------------------------------------------------------------
          If . . .                And if . . .           Then . . .
------------------------------------------------------------------------
(i) the total of your bids                          you must report your
 and your net long position                          net long position
 in the security being                               (which does not
 auctioned equals or exceeds                         include your bids).
 the reporting threshold.
(ii) the total of your bids   you have no position  you must report a
 in the auction equals or      or a net short        zero.
 exceeds the reporting         position in the
 threshold.                    security being
                               auctioned.
(iii) the total of your bids                        you may either
 and your net long position                          report nothing
 in the security being                               (leave the field
 auctioned is less than the                          blank) or report
 reporting threshold.                                your net long
                                                     position.
------------------------------------------------------------------------

    (2) Also, if you have more than one bid in an auction and you must 
report either your net long position or a zero, you must report that 
figure only once. Finally, if you are a customer and must report either 
your net long position or a zero, you must report that figure through 
only one depository institution or dealer. (See Sec.  356.14(d).)
    (b) ``As of'' time for calculating net long position. You must 
calculate your net long position as of one half-hour prior to the 
closing time for receipt of competitive bids.
    (c) Components of the net long position. Except as modified in 
paragragh (d) of this section, your net long position is the sum total 
of the par amounts of:
    (1) Your holdings of outstanding securities with the same CUSIP 
number as the security being auctioned;
    (2) Your holdings of STRIPS principal components of the security 
being auctioned, and;
    (3) Your positions, in the security being auctioned, in:
    (i) When-issued trading, including when-issued trading positions of 
the STRIPS principal components;
    (ii) Futures contracts that require delivery of the specific 
security being auctioned (but not futures contracts for which the 
security being auctioned is one of several securities that may be 
delivered, and not futures contracts that are cash-settled); and
    (iii) Forward contracts that require delivery of the specific 
security being auctioned or of the STRIPS principal component of that 
security.
    (d) Calculating the net long position in a reopening. In a 
reopening (additional issue) of an outstanding security, you may 
subtract the exclusion amount stated in the auction announcement from:
    (1) Your holdings of the outstanding securities (paragraph (c)(1) 
of this section) combined with
    (2) Your holdings of STRIPS principal components of the security 
being auctioned (paragraph (c)(2) of this section). We will specify the 
amount of holdings that you may exclude from the net long position 
calculation in the auction announcement. You may not take the exclusion 
if your combined holdings are zero or less. The exclusion is optional, 
but if you take the exclusion, you must include any holdings that 
exceed the exclusion amount in calculating your net long position. If 
the exclusion amount is greater than your combined holdings (paragraphs 
(c)(1) and (2) of this section), you may calculate the combined 
holdings as zero, but they cannot be included in the calculation as a 
negative number.


Sec.  356.14  What are the requirements for submitting bids for 
customers?

    (a) Institutions that may submit bids for customers. Only 
depository institutions or dealers may submit bids for customers, or 
for customers of intermediaries, under the requirements set out in this 
section. If a bid from a depository institution or a dealer fulfills a 
guarantee to a customer to sell a specified amount of securities at an 
agreed-upon price, or a price fixed in terms of an agreed-upon 
standard, then the bid is a bid of that depository institution or 
dealer. It is not a customer bid.
    (b) Payment. Submitters must remit payment for bids they submit on 
behalf of customers, including customers of intermediaries, that result 
in awards of securities in the auction.
    (c) Identifying customers. Submitters must provide the names of 
customers whenever they submit bids for them. Submitters must provide 
the names of their direct customers as well as customers of any 
intermediaries who are forwarding customer bids. For individuals, 
submitters must provide the customer's full name (first and last). For 
institutional customers, submitters must provide the name of the 
institution, and the bidder identification number if the customer 
provides it. For trusts or other fiduciary estates (See Appendix A.), 
submitters must provide on the customer list:
    (1) The full name or title of the trustee or fiduciary;
    (2) A reference to the document creating the trust or fiduciary 
estate with date of execution; and
    (3) The employer identification number (not social security number) 
of the trust or fiduciary estate. We do not consider trusts to be a 
separate bidder that have not been assigned, or that do not provide, an 
employer identification number.
    (d) Competitive customer bids. For each customer competitive bid, 
the submitter must provide the customer's name, the amount bid, and the 
yield or discount rate. The submitter or intermediary must also report 
the net long position amount if the customer provides it. The submitter 
must inform a customer of the net long position reporting requirement 
(See Sec.  356.13.) if the customer is bidding for $100 million or more 
of securities. If the submitter's or intermediary's personnel know that 
the customer's position information is not correct, the submitter or 
intermediary may not submit the customer's bid.
    (e) Noncompetitive customer bids. For each noncompetitive bid, the 
submitter must provide the customer's name and the amount bid. 
Submitters may either provide the customer's name with the bid or, if 
the list of customers is lengthy, the submitter may provide a summary 
bid amount covering all noncompetitive customers. If it provides a 
summary bid amount, the submitter must transmit the list of individual 
customers and their bid amounts by close of business on the auction 
day. However, the submitter must be able to provide the customer list 
details by the noncompetitive bidding deadline if requested.


Sec.  356.15  What rules apply to bids submitted by investment 
advisers?

    (a) General. The auction rules that apply to investment advisers 
are determined by the relationship between ``investment advisers'' and 
``controlled accounts.'' An investment adviser means any person or 
entity that has investment discretion for the bids or positions of a 
different person or entity (a controlled account). A person or entity 
has investment discretion if it determines what, how many, and when 
securities will be purchased or sold on behalf of another person or 
entity. We consider a person that is employed or

[[Page 45208]]

supervised by an investment adviser to be part of that investment 
adviser. We also consider the bids or positions of controlled accounts 
to be separate from the bids or positions of the person or entity with 
which they would otherwise be associated under the bidder categories in 
Appendix A of this part.
    (b) Bidding options. (1) An investment adviser has two options for 
whose name to use when bidding on behalf of controlled accounts.

------------------------------------------------------------------------
  An investment adviser may bid for a     In such cases, we consider the
        controlled account . . .                bidder to be . . .
------------------------------------------------------------------------
(i) in the investment adviser's own      the investment adviser.
 name.
(ii) in the name of the controlled       the controlled account.
 account.
------------------------------------------------------------------------

    (2) Using the first option (paragraph (b)(1)(i)), an investment 
advisor could bid noncompetitively up to the noncompetitive bidding 
limit only for itself, as a single bidder. Using the second option 
(paragraph (b)(1)(ii)), an investment adviser could bid 
noncompetitively for each separately named controlled account up to the 
noncompetitive bidding limit. The investment adviser could also bid 
noncompetitively in its own name in the same auction up to the 
noncompetitive bidding limit. An investment adviser may not bid for a 
controlled account both noncompetitively and competitively in the same 
auction. If an investment adviser is bidding competitively in the name 
of a controlled account, the controlled account is subject to the award 
limitations of Sec.  356.22(b).
    (c) Reporting net long positions. If it is bidding competitively, 
an investment adviser must calculate the amount of its bids and 
positions for purposes of the net long position reporting requirement 
found in Sec.  356.13(a). In addition to its own competitive bids and 
positions, the investment adviser must also include in the calculation 
all other competitive bids and positions that it controls. If the net 
long position is reportable, the investment adviser must report it as a 
total in connection with only one bid as stated in Sec.  356.13(a). 
This requirement applies regardless of whether the investment adviser 
bids in its own name or in the name of its controlled accounts. The 
following table shows which positions an investment adviser must 
include to determine whether it meets the net long position reporting 
threshold in Sec.  356.13(a). If an investment adviser does meet the 
reporting threshold, the table also shows which positions must be 
included in, and which may be excluded from, the net long position 
calculation.

------------------------------------------------------------------------
  If an investment adviser is bidding
        competitively, and . . .                    Then . . .
------------------------------------------------------------------------
(1) the investment adviser has a net     that position must be included
 long position for its own account.       in the investment adviser's
                                          net long position calculation.
(2) the investment adviser's             any net long position of that
 competitive bid is for a controlled      account must be included in
 account.                                 the investment adviser's net
                                          long position calculation.
(3) the investment adviser is not
 bidding competitively for a controlled
 account and . . ..
(i) the controlled account has a net     that position must be included
 long position of $100 million or more.   in the investment adviser's
                                          net long position calculation.
(ii) the controlled account has a net    that position may be excluded
 long position that is less than $100     from the investment adviser's
 million.                                 net long position calculation.
(iii) any net long position is excluded  all net short positions of
 under paragraph (b)(3)(ii) of this       controlled accounts under $100
 table.                                   million must also be excluded.
------------------------------------------------------------------------

    (d) Certifications. When an investment adviser bids for a 
controlled account, we deem the investment adviser to have certified 
that it is complying with this part and the auction announcement for 
the security. Further, we deem the investment adviser to have certified 
that the information it provided about bids for controlled accounts is 
accurate and complete.
    (e) Proration of awards. Investment advisers that submit 
competitive bids in the names of controlled accounts are responsible 
for prorating any awards at the highest accepted yield or discount rate 
using the same percentage that we announce. See Sec.  356.21 for 
examples of how to prorate.


Sec.  356.16  Do I have to make any certifications?

    (a) Submitters. If you submit bids or other information in an 
auction, we deem you to have certified that:
    (1) You are in compliance with this part and the auction 
announcement;
    (2) The information provided with regard to any bids for your own 
account is accurate and complete; and
    (3) The information provided with regard to any bids for customers 
accurately and completely reflects information provided by your 
customers or intermediaries.
    (4) If you submit bids by computer, you must have on file a written 
certification that, each time you submit such bids, you are in 
compliance with this part and the applicable auction announcement. An 
authorized person must sign and date the certification on behalf of the 
submitter, and it must be filed with us and renewed at least annually.
    (b) Intermediaries. If you forward bids in an auction, we deem you 
to have certified that:
    (1) You are in compliance with this part and the applicable auction 
announcement; and
    (2) That the information you provided to a submitter or other 
intermediary with regard to bids for customers accurately and 
completely reflects information provided by those customers or 
intermediaries.
    (c) Customers. By bidding for a security as a customer we deem you 
to have certified that:
    (1) You are in compliance with this part and the auction 
announcement and;
    (2) The information you provided to the submitter or intermediary 
in connection with the bid is accurate and complete.


Sec.  356.17  How and when do I pay for securities awarded in an 
auction?

    (a) General. By bidding in an auction, you agree to pay the 
settlement amount for any securities awarded to you. (See Sec.  
356.25.) For notes and bonds, the

[[Page 45209]]

settlement amount may include a premium amount, accrued interest, and, 
for inflation-protected securities, an inflation adjustment.
    (b) TreasuryDirect. Unless you make other provisions, you must pay 
by debit entry to a deposit account or submit payment with your bids. 
To pay by debit entry, you must first authorize us to make debit 
entries to your deposit account under 31 CFR part 370. Payment by debit 
entry occurs on the settlement date for the actual settlement amount 
due. (See Sec.  356.25.) You may also pay for reinvestments with 
maturing securities, however, you must pay separately for any premium, 
accrued interest, or inflation adjustment as soon as you receive your 
Payment Due Notice.
    (1) Bidding by computer or by telephone. If you are bidding by 
computer or by telephone, you must pay for any securities awarded to 
you by debit entry to a deposit account.
    (2) Bidding by paper form. If you are mailing bids to us on a paper 
form, you may either enclose your payment with the form or pay for any 
securities awarded to you by debit entry to a deposit account.
    (i) Payment with paper form. For bills, you may pay by depository 
institution (cashier's or teller's) check, certified check, or 
currently dated Treasury or fiscal agency check made payable to you. 
For notes or bonds, in addition to the payment options for bills, you 
may also pay by personal check. If you submit a personal check, make it 
payable to TreasuryDirect and mail it to the Federal Reserve Bank 
handling your account. In your payment amount you must include the par 
amount and any announced accrued interest and/or inflation adjustment.
    (ii) Payment by debit entry to a deposit account. If a depository 
institution or dealer is submitting your bids for securities to be held 
in TreasuryDirect, payment may be either by debit entry to a deposit 
account or by allowing us to charge the Federal Reserve Bank funds 
account of a depository institution.
    (3) Payment by maturing securities. You may use maturing securities 
held in TreasuryDirect as payment for reinvestments into new securities 
that we are offering, as long as we receive the appropriate transaction 
request on time.
    (c) Commercial book-entry system. Unless you make other provisions, 
payment of the settlement amount must be by charge to the funds account 
of a depository institution at a Federal Reserve Bank.
    (1) A submitter that does not have a funds account at a Federal 
Reserve Bank or that chooses not to pay by charge to its own funds 
account must have an approved autocharge agreement on file with us 
before submitting any bids. Any depository institution whose funds 
account will be charged under an autocharge agreement will receive 
advance notice from us of the total par amount of, and price to be 
charged for, securities awarded as a result of the submitter's bids.
    (2) A submitter that is a member of a clearing corporation may 
instruct that delivery and payment be made through the clearing 
corporation for securities awarded to the submitter for its own 
account. To do this, the following requirements must be met prior to 
submitting any bids:
    (i) We must have acknowledged and have on file an autocharge 
agreement between the clearing corporation and a depository 
institution. By entering into such an agreement, the clearing 
corporation authorizes us to provide aggregate par and price 
information to the depository institution whose funds account will be 
charged under the agreement. The clearing corporation is responsible 
for remitting payment for auction awards of the clearing corporation 
member.
    (ii) We must have acknowledged and have on file a delivery and 
payment agreement between the submitter and the clearing corporation. 
By entering into such an agreement, the submitter authorizes us to 
provide award and payment information to the clearing corporation.

Subpart C--Determination of Auction Awards; Settlement


Sec.  356.20  How does the Treasury determine auction awards?

    (a) Determining the range and amount of accepted competitive bids--
    (1) Accepting bids. First we accept in full all noncompetitive bids 
that were submitted by the noncompetitive bidding deadline. After the 
closing time for receipt of competitive bids we start accepting those 
at the lowest yields or discount rates through successively higher 
yields or discount rates, up to the amount required to meet the 
offering amount. When necessary, we prorate bids at the highest 
accepted yield or discount rate as described below. If the amount of 
noncompetitive bids would absorb most or all of the offering amount, we 
will accept competitive bids in an amount sufficient to provide a fair 
determination of the yield or discount rate for the securities we are 
auctioning.
    (2) Accepting bids at the high yield or discount rate. Generally, 
the total amount of bids at the highest accepted yield or discount rate 
exceeds the offering amount remaining after we accept the 
noncompetitive bids and the competitive bids at the lower yields or 
discount rates. In order to keep the total amount of awards as close as 
possible to the announced offering amount, we award a percentage of the 
bids at the highest accepted yield or discount rate. We derive the 
percentage by dividing the remaining par amount needed to fill the 
offering amount by the par amount of the bids at the high yield or 
discount rate and rounding up to the next hundredth of a whole 
percentage point, for example, 17.13%.
    (b) Determining the interest rate for new note and bond issues. We 
set the interest rate at a \1/8\ of one percent increment.
    (1) Single-price auctions. The interest rate we establish produces 
the price closest to, but not above, par when evaluated at the yield of 
awards to successful competitive bidders.
    (2) Multiple-price auctions. The interest rate we establish 
produces the price closest to, but not above, par when evaluated at the 
weighted-average yield of awards to successful competitive bidders.
    (c) Determining purchase prices for awarded securities. We round 
price calculations to three decimal places on the basis of price per 
hundred, for example, 99.954 (See Appendix B.).
    (1) Single-price auctions. We award securities to both 
noncompetitive and competitive bidders at the price equivalent to the 
highest discount rate or yield at which bids were accepted. For 
inflation-protected securities, the price for awarded securities is the 
price equivalent to the highest accepted real yield.
    (2) Multiple-price auctions--(i) Competitive bids. We award 
securities to competitive bidders at the price equivalent to each yield 
or discount rate at which their bids were accepted.
    (ii) Noncompetitive bids. We award securities to noncompetitive 
bidders at the price equivalent to the weighted average yield or 
discount rate of accepted competitive bids.


Sec.  356.21  How are awards at the high yield or discount rate 
calculated?

    (a) Awards to submitters. We generally prorate bids at the highest 
accepted yield or discount rate under Sec.  356.20(a)(2) of this part. 
For example, if 80.15% is the announced percentage at the highest yield 
or discount rate, we award 80.15% of the amount of each bid at that 
yield or rate. A bid for $100

[[Page 45210]]

million at the highest accepted yield or discount rate would be awarded 
$80,150,000 in this example. We always make awards for at least the 
minimum to bid, and above that amount we make awards in the appropriate 
multiple to bid. For example, Treasury bills may be issued with a 
minimum to bid of $1,000 and multiples to bid of $1,000. Say we accept 
an $18,000 bid at the high discount rate, and the percent awarded at 
the high discount rate is 88.27%. We would award $16,000 to that 
bidder, which is an upward adjustment from $15,888.60 ($18,000 x .8827) 
to the nearest multiple of $1,000. If we were to award 4.65% of bids at 
the highest accepted rate, for example, the award for a $10,000 bid at 
that rate would be $1,000, rather than $465, in order to meet the 
minimum to bid for a bill issue.
    (b) Awards to customers. The same prorating rules apply to 
customers as apply to submitters. Depository institutions and dealers, 
whether submitters or intermediaries, are responsible for prorating 
awards for their customers at the same percentage that we announce. For 
example, if 80.15% is the announced percentage at the highest yield or 
discount rate, then each customer bid at that yield or rate must be 
awarded 80.15%.


Sec.  356.22  Does the Treasury have any limitations on auction awards?

    (a) Awards to noncompetitive bidders. The maximum award to any 
bidder is $1 million for bills and $5 million for notes and bonds. This 
limit does not apply to bidders bidding solely through TreasuryDirect 
reinvestment requests.
    (b) Awards to competitive bidders. The maximum award is 35 percent 
of the offering amount less the bidder's net long position as 
reportable under Sec.  356.13. For example, in a note auction with a 
$10 billion offering amount, and therefore a maximum award of $3.5 
billion, a bidder with a reported net long position of $1 billion could 
receive a maximum auction award of $2.5 billion. When the bids and net 
long positions of more than one person or entity must be combined, as 
is the case with investment advisers and controlled accounts (See Sec.  
356.15(c).), we will use this combined amount for the purpose of this 
35 percent award limit.


Sec.  356.23  How are the auction results announced?

    (a) After the conclusion of the auction, we will announce the 
auction results through a press release that is available on our Web 
site at www.publicdebt.treas.gov.
    (b) The press release will include such information as:
    (1) The amounts of bids we accepted and the amount of securities we 
awarded;
    (2) The range of accepted yields or discount rates;
    (3) The proration percentage;
    (4) The interest rate for a note or bond;
    (5) A breakdown of the amounts of noncompetitive and competitive 
bids we accepted from, and awarded to, the public;
    (6) The amounts of bids tendered and accepted from the Federal 
Reserve Banks for their own accounts;
    (7) The bid-to-cover ratio; and
    (8) Other information that we may decide to include.


Sec.  356.24  Will I be notified directly of my awards and, if I am 
submitting bids for others, do I have to provide confirmations?

    (a) Notice of awards--(1) Notice to submitters. We will provide 
notice to all submitters letting them know whether their bids were 
successful or not.
    (2) Notice to clearing corporations. If we are to deliver awarded 
securities under a delivery and payment agreement, we will provide 
notice of the awards to the clearing corporation that is a party to the 
agreement.
    (b) Notification of awards to customers. If you are a submitter for 
customers, you are responsible for notifying them of their awards. You 
are also responsible for notifying any intermediaries that forwarded 
successful bids to you. Similarly, an intermediary is responsible for 
providing notification of any awards to its customers and any 
intermediaries from whom it received bids.
    (c) Notification of awards and settlement amounts to a depository 
institution having an autocharge agreement with a submitter or a 
clearing corporation. We will notify each depository institution that 
has entered into an autocharge agreement with a submitter or a clearing 
corporation of the amount to be charged, on the issue date, to the 
institution's funds account at the Federal Reserve Bank servicing the 
institution. We will provide this notification no later than the day 
after the auction.
    (d) Customer confirmation. Any customer awarded a par amount of 
$500 million or more in an auction must send us a confirmation 
containing the information in paragraphs (d)(1) and (2) of this 
section. The confirmation must be sent no later than 10:00 a.m. on the 
day following the auction. The confirmation must be signed by the 
customer or authorized representative. If signed by an authorized 
representative, the confirmation must include the capacity in which the 
representative is acting. A submitter or intermediary submitting or 
forwarding bids for a customer must notify the customer of this 
requirement if we award the customer $500 million or more as a result 
of those bids. The information the customer must provide in writing is:
    (1) A confirmation of the awarded bid(s), including the name of the 
submitter that submitted the bid(s) on the customer's behalf, and
    (2) A statement indicating whether the customer had a reportable 
net long position as defined in Sec.  356.13. If a position had to be 
reported, the statement must provide the amount of the position and the 
name of the submitter that the customer requested to report the 
position.


Sec.  356.25  How does the settlement process work?

    Securities bought in the auction must be paid for by the issue 
date. The payment amount for awarded securities will be the settlement 
amount as defined in Sec.  356.2. (See formulas in Appendix B.) There 
are several ways to pay for securities:
    (a) Payment by debit entry to a deposit account. If you are paying 
by debit entry to a deposit account as provided for in Sec.  
356.17(b)(1) or (b)(2), we will charge the settlement amount to the 
specified account on the issue date.
    (b) Payment by authorized charge to a funds account. Where the 
submitter's method of payment is an authorized charge to the funds 
account of a depository institution as provided for in Sec.  
356.17(c)(1) and (c)(2), we will charge the settlement amount to the 
specified funds account on the issue date.
    (c) Payment with bids. If you paid the par amount with your bids as 
provided for in Sec.  356.17(b)(2), you may have to pay an additional 
amount, or we may have to pay an amount to you, as follows:
    (1) When we owe an amount to you. If the amount you paid is more 
than the settlement amount, we will refund the balance to you after the 
auction. This situation will generally be the case if you submit 
payment with your bids. A typical example would be an auction where the 
price is a discount from par and there is no accrued interest.
    (2) When you must remit an additional amount. If the settlement 
amount is more than the amount you paid, we will notify you of the 
additional amount due, which you will be responsible for remitting 
immediately. You may owe us such an additional amount if the auction

[[Page 45211]]

calculations result in a premium or if accrued interest or an inflation 
adjustment is due.

Subpart D--Miscellaneous Provisions


Sec.  356.30  When does the Treasury pay principal and interest on 
securities?

    (a) General. We will pay principal on bills, notes, and bonds on 
the maturity date as specified in the auction announcement. Interest on 
bills consists of the difference between the discounted amount paid by 
the investor at original issue and the par value we pay to the investor 
at maturity. Interest on notes and bonds accrues from the dated date. 
Interest is payable on a semiannual basis on the interest payment dates 
specified in the auction announcement through the maturity date. If any 
principal or interest payment date is a Saturday, Sunday, or other day 
on which the Federal Reserve System is not open for business, we will 
make the payment (without additional interest) on the next business 
day. If a bond is callable, we will pay the principal prior to maturity 
if we call it under its terms, which include providing appropriate 
public notice.
    (b) Treasury inflation-protected securities. (1) This table 
explains the amount that we will pay to holders of inflation-protected 
securities at maturity.

------------------------------------------------------------------------
         At maturity, if . . .                      then . . .
------------------------------------------------------------------------
(i) the inflation-adjusted principal is  we will pay the inflation-
 equal to or more than the par amount     adjusted principal.
 of the security..
(ii) the inflation-adjusted principal    we will pay an additional
 is less than the par amount of the       amount so that the additional
 security, and the security has not       amount plus the inflation-
 been stripped..                          adjusted principal equals the
                                          par amount.
(iii) the inflation-adjusted principal   to holders of principal
 is less than the par amount of the       components only we will pay an
 security, and the security has been      additional amount so that the
 stripped..                               additional amount plus the
                                          inflation-adjusted principal
                                          equals the par amount.
------------------------------------------------------------------------

    (2) Regardless of whether or not we pay an additional amount, we 
will base the final interest payment on the inflation-adjusted 
principal at maturity.
    (c) Discharge of payment obligations--
    (1) The commercial book-entry system. We discharge our payment 
obligations when we credit payment to the account maintained at a 
Federal Reserve Bank for a depository institution or other authorized 
entity, or when we make payment according to the instructions of the 
person or entity maintaining the account. Further, we do not have any 
obligations to any person or entity that does not have an account with 
a Federal Reserve Bank. We also will not recognize the claims of any 
person or entity:
    (i) That does not have an account at a Federal Reserve Bank, or
    (ii) With respect to any accounts not maintained at a Federal 
Reserve Bank.
    (2) TreasuryDirect. We discharge our payment obligations when we 
make payment to a depository institution for credit to the account 
specified by the owner of the security, or when we make payment 
according to the instructions of the security's owner or the owner's 
legal representative.


Sec.  356.31  How does the STRIPS program work?

    (a) General. Notes or bonds may be ``stripped''--divided into 
separate principal and interest components. These components must be 
maintained in the commercial book-entry system. Stripping is done at 
the option of the holder, and may occur at any time from issuance until 
maturity. We provide the CUSIP numbers and payment dates for the 
principal and interest components in auction announcements and on our 
website at www.publicdebt.treas.gov.
    (b) Treasury fixed-principal securities (notes and bonds other than 
Treasury inflation-protected securities--(1) Minimum par amounts 
required for STRIPS. The minimum par amount of a fixed-principal 
security that may be stripped 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 fixed-
principal securities are maintained in accounts, and transferred, at 
their par amount. They 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 have the following features:
    (i) They are maintained in accounts, and transferred, at their 
original payment value, which is derived by multiplying the semiannual 
interest rate and the par amount;
    (ii) Their interest payment date becomes the maturity date for the 
component;
    (iii) All interest components with the same maturity date have the 
same CUSIP number, regardless of the underlying security from which the 
interest payments were stripped, and therefore are fungible 
(interchangeable).
    (iv) the CUSIP numbers of interest components are different from 
the CUSIP numbers of principal components and fully constituted 
securities, even if they have the same maturity date, and therefore are 
not fungible.
    (c) Treasury inflation-protected securities--(1) Minimum par 
amounts required for STRIPS. The minimum par amount of an inflation-
protected security that may be stripped 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-protected securities are maintained in accounts, and 
transferred, at their par amount. At maturity, the holder will receive 
the inflation-adjusted principal or the par amount, whichever is 
greater. (See Sec.  356.30.) A principal component has a CUSIP number 
that is different from the CUSIP number of the fully constituted 
(unstripped) security.
    (3) Interest components.--(i) Adjusted value. Interest components 
stripped from inflation-protected securities are maintained in 
accounts, and transferred, at their adjusted value. This value 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. (The dated date is used instead of the 
original issue date when the dates are different.) See Appendix B, 
Section IV of this part for an example of how to do this calculation.
    (ii) CUSIP numbers. When an interest payment is stripped from an 
inflation-protected security, the interest payment date becomes the 
maturity date for the component. All interest components with the same 
maturity date have the same CUSIP number, regardless of the underlying 
security from which the interest payments were stripped. Such interest 
components are fungible (interchangeable). The CUSIP numbers of 
interest components are different from the CUSIP numbers of principal

[[Page 45212]]

components and fully constituted securities, even if they have the same 
maturity date.
    (iii) Payment at maturity. 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 of this part for an example of how to do 
this calculation.
    (iv) Rebasing of the CPI. If the CPI is rebased to a different time 
base reference period (See Appendix D.), the adjusted values of all 
outstanding inflation-protected interest components will be converted 
to adjusted values based on the new base reference period. At that 
time, we will publish information that describes how this conversion 
will occur. After rebasing, any interest components created from a 
security that was issued during a prior base reference period will be 
issued with adjusted values calculated using reference CPIs under the 
most-recent base reference period.
    (d) Reconstituting a security. Stripped interest and principal 
components may be reconstituted, that is, put back together into 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. Because 
inflation-protected interest components are different from fixed-
principal interest components, they are not interchangeable for 
reconstitution purposes.
    (e) Applicable regulations. Subparts A, B, and D of part 357 of 
this chapter govern notes and bonds stripped into their STRIPS 
components, unless we state differently in this part.


Sec.  356.32  What tax rules apply?

    (a) General. Securities issued under this part are subject to all 
applicable taxes imposed under the Internal Revenue Code of 1986, or 
its successor. Under section 3124 of title 31, United States Code, the 
securities are exempt from taxation by a State or political subdivision 
of a State, except for State estate or inheritance taxes and other 
exceptions as provided in that section.
    (b) Treasury inflation-protected securities. Special federal income 
tax rules for inflation-protected securities, including stripped 
inflation-protected principal and interest components, are set forth in 
Internal Revenue Service regulations.


Sec.  356.33  Does the Treasury have any discretion in the auction 
process?

    (a) We have the discretion to:
    (1) Accept, reject, or refuse to recognize any bids submitted in an 
auction;
    (2) Award more or less than the amount of securities specified in 
the auction announcement;
    (3) Waive any provision of this part for any bidder or submitter; 
and
    (4) Change the terms and conditions of an auction.
    (b) Our decisions under this part are final. We will provide a 
public notice if we change any auction provision, term, or condition.
    (c) We reserve the right to modify the terms and conditions of new 
securities and to depart from the customary pattern of securities 
offerings at any time.


Sec.  356.34  What could happen if someone does not fully comply with 
the auction rules or fails to pay for securities?

    (a) General. If a person or entity fails to comply with any of the 
auction rules in this part, we will consider the circumstances and take 
what we deem to be appropriate action. This could include barring the 
person or entity from participating in future auctions under this part. 
We also may refer the matter to an appropriate regulatory agency.
    (b) Liquidated damages. If you fail to pay for awarded securities 
in a timely manner, we may require you to pay liquidated damages of up 
to one percent of the par amount of securities we awarded to you. Our 
use of this liquidated damages remedy does not preclude us from using 
any other appropriate remedy.


Sec.  356.35  Who approved the information collections?

    The Office of Management and Budget approved the collections of 
information contained in Sec. Sec.  356.11, 356.12, 356.13, 356.14, and 
356.15 and in Appendix A of this part under control number 1535-0112.

Appendix A to Part 356--Bidder Categories

I. Categories of Eligible Bidders

    We describe below various categories of bidders eligible to bid 
in Treasury auctions. You may use them to determine whether we 
consider you and other entities to be one bidder or more than one 
bidder for auction bidding and compliance purposes. For example, we 
use these definitions to apply the competitive and noncompetitive 
award limitations and for other requirements. Notwithstanding these 
definitions, we consider any persons or entities that intentionally 
act together with respect to bidding in a Treasury auction to 
collectively be one bidder. Even if an auction participant does not 
fall under any of the categories listed below, it is our intent that 
no auction participant receives a larger auction award by acquiring 
securities through others than it could have received had it been 
considered one of these types of bidders.
    (a) Corporation--We consider a corporation to be one bidder. A 
corporation includes all of its affiliates, which may be persons, 
partnerships, or other entities. We use the term ``corporate 
structure'' to refer to the collection of affiliates that we 
consider collectively to be one bidder. An affiliate is any:
     Entity that is more than 50% owned, directly or 
indirectly, by the corporation;
     Entity that is more than 50% owned, directly or 
indirectly, by any other affiliate of the corporation;
     Person or entity that owns, directly or indirectly, 
more than 50% of the corporation;
     Person or entity that owns, directly or indirectly, 
more than 50% of any other affiliate of the corporation; or
     Entity, a majority of whose board of directors or a 
majority of whose general partners are directors or officers of the 
corporation, or of any affiliate of the corporation.
    We consider a business trust, such as a Massachusetts or 
Delaware business trust, to be a corporation.
    (b) Partnership--We consider a partnership to be one bidder if 
it is a partnership for which the Internal Revenue Service has 
assigned a tax-identification number. A partnership includes all of 
its affiliates, which may be persons, corporations, general partners 
acting on behalf of the partnership, or other entities. We use the 
term ``partnership structure'' to refer to the collection of 
affiliates that we consider collectively to be one bidder. We may 
consider a partnership structure that contains one or more 
corporations as a ``partnership'' or a ``corporation,'' but not 
both.
    An affiliate is any:
     Entity that is more than 50% owned, directly or 
indirectly, by the partnership;
     Entity that is more than 50% owned, directly or 
indirectly, by any other affiliate of the partnership;
     Person or entity that owns, directly or indirectly, 
more than 50% of the partnership;
     Person or entity that owns, directly or indirectly, 
more than 50% of any other affiliate of the partnership; or
     Entity, a majority of whose general partners or a 
majority of whose board of directors are general partners or 
directors of the partnership or of any affiliate of the partnership.
    (c) Government-related entity--We consider each of the following 
entities to be one bidder:
    (1) A state government or the government of the District of 
Columbia
    (2) A unit of local government, including any county, city, 
municipality, or township, or other unit of general government as 
defined by the Bureau of the Census for statistical purposes.
    (3) A commonwealth, territory, or possession of the United 
States.
    (4) A governmental entity, body, or corporation established 
under Federal, State, or local law.
    (5) A foreign central bank, the government of a foreign state, 
or an international

[[Page 45213]]

organization in which the United States holds membership. This type 
of entity applies only when such entity is not using an account at 
the Federal Reserve Bank of New York (See paragraph (f).).
    We generally consider an investment, reserve, or other fund of 
one of the above government-related entities as part of that entity 
and not a separate bidder. We will consider a government-related 
entity's fund to be a separate bidder if it meets the definition of 
the ``trust or other fiduciary estate'' category, or if applicable 
law requires that the investments of such fund be made separately.
    (d) Trust or other fiduciary estate--We consider a legal entity 
created under a valid trust instrument, court order, or other legal 
authority that designates a trustee or fiduciary to act for the 
benefit of a named beneficiary to be one bidder. The following 
conditions must also be met for us to consider a trust entity to be 
one bidder:
     The legal entity must be able to be identified by:
    1. The name or title of the trustee or fiduciary;
    2. Specific reference to the trust instrument, court order, or 
legal authority under which the trustee or fiduciary is acting; and
    3. The unique IRS-assigned employer identification number (not 
social security number) for the entity.
     The trustee or fiduciary must make the decisions on 
participating in auctions on behalf of the trust or fiduciary 
estate.
    (e) Individual--We consider a person to be one bidder, 
regardless of whether he or she is acting as an individual, a sole 
proprietor, or for any entity not otherwise defined as a bidder. If 
a person meets the definition of an affiliate within a corporate or 
partnership structure, we will consider him or her to be a bidder in 
this ``individual'' category if the corporation or partnership is 
not bidding in the same auction. We do not consider a person acting 
in an official capacity as an employee or other representative of a 
bidder defined in any other category to be an ``individual'' bidder. 
We consider a person, his or her spouse, and any children under the 
age of 21 having a common household to be one ``individual'' bidder.
    (f) Foreign and International Monetary Authority (``FIMA'')--We 
consider one or more parties making up a foreign or international 
monetary organization that is not private in nature to be a bidder 
called a FIMA entity if at least one of the parties is a foreign or 
international entity that is (i) financial in nature, or (ii) not 
financial in nature but is authorized to open an account at the 
Federal Reserve Bank of New York. We consider each of the following 
entities to be a single FIMA entity:
    (1) A foreign central bank or regional central bank.
    (2) A foreign governmental monetary or finance entity.
    (3) A non-governmental international financial organization that 
is not private in nature (for example, the International Monetary 
Fund, the World Bank, the Inter-American Development Bank, and the 
Asian Development Bank).
    (4) A non-financial international organization that the United 
States participates in (for example, the United Nations).
    (5) A multi-party arrangement of a governmental ministry and/or 
a foreign central bank or monetary authority with a United States 
Government Department and/or the Federal Reserve Bank of New York.
    (6) A foreign or international monetary entity or an entity 
authorized by statute or by us to open accounts at the Federal 
Reserve Bank of New York.
    (g) Other Bidder--We do not consider a bidder defined by any of 
the above categories to be a bidder in this category. For purposes 
of this definition, ``other bidder'' means an institution or 
organization with a unique IRS-assigned employer identification 
number. This definition includes such entities as an association, 
church, university, union, or club. This category does not include 
any person or entity acting in a fiduciary or investment management 
capacity, a sole proprietorship, an investment account, an 
investment fund, a form of registration, or investment ownership 
designation.

II. How To Obtain Separate Bidder Recognition

    Under certain circumstances, we may recognize a major 
organizational component (e.g., the parent or a subsidiary) in a 
corporate or partnership structure as a bidder separate from the 
larger corporate or partnership structure. We also may recognize two 
or more major organizational components collectively as one bidder. 
All of the following criteria must be met for such component(s) to 
qualify for recognition as a separate bidder:
    (a) Such component(s) must be prohibited by law or regulation 
from exchanging, or must have established written internal 
procedures designed to prevent the exchange of, information related 
to bidding in Treasury auctions with any other component in the 
corporate or partnership structure;
    (b) Such component(s) must not be created for the purpose of 
circumventing our bidding and award limitations;
    (c) Decisions related to purchasing Treasury securities at 
auction and participation in specific auctions must be made by 
employees of such component(s). Employees of such component(s) that 
make decisions to purchase or dispose of Treasury securities must 
not perform the same function for other components within the 
corporate or partnership structure; and
    (d) The records of such component(s) related to the bidding for, 
acquisition of, and disposition of Treasury securities must be 
maintained by such component(s). Those records must be 
identifiable--separate and apart from similar records for other 
components within the corporate or partnership structure. To obtain 
recognition as a separate bidder, each component or group of 
components must request such recognition from us, provide a 
description of the component or group and its position within the 
corporate or partnership structure, and provide the following 
certification:
    [Name of the bidder] hereby certifies that to the best of its 
knowledge and belief it meets the criteria for a separate bidder as 
described in Appendix A to 31 CFR Part 356. The above-named bidder 
also certifies that it has established written policies or 
procedures, including ongoing compliance monitoring processes, that 
are designed to prevent the component or group of components from:
    (1) Exchanging any of the following information with any other 
part of the corporate [partnership] structure: (a) yields or rates 
at which it plans to bid; (b) amounts of securities for which it 
plans to bid; (c) positions that it holds or plans to acquire in a 
security being auctioned; and (d) investment strategies that it 
plans to follow regarding the security being auctioned, or
    (2) In any way intentionally acting together with any other part 
of the corporate [partnership] structure with respect to formulating 
or entering bids in a Treasury auction.
    The above-named bidder agrees that it will promptly notify the 
Department in writing when any of the information provided to obtain 
separate bidder status changes or when this certification is no 
longer valid.

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-Protected Security Yields 
to Equivalent Prices.
IV. Computation of Adjusted Values and Payment Amounts for Stripped 
Inflation-Protected Interest Components.
V. Computation of Purchase Price, Discount Rate, and Investment Rate 
(Coupon-Equivalent Yield) for Treasury Bills.
    The examples in this appendix are given for illustrative 
purposes only and are in no way a prediction of interest rates on 
any bills, notes, or bonds issued under this part. In some of the 
following examples, we use intermediate rounding for ease in 
following the calculations. In actual practice, we generally do not 
round prior to determining the final result.
    If you use a multi-decimal calculator, we recommend setting your 
calculator to at least 13 decimals and then applying normal rounding 
procedures. This should be sufficient to obtain the same final 
results. However, in the case of any discrepancies, our 
determinations will be final.

I. Computation of Interest on Treasury Bonds and Notes

A. Treasury Fixed-Principal Securities

    1. Regular Half-Year Payment Period. We pay interest on 
marketable Treasury fixed-principal securities on a semiannual 
basis. The regular interest payment period is a full half-year of 
six calendar months. Examples of half-year periods are: (1) February 
15 to August 15, (2) May 31 to November 30, and (3) February 29 to 
August 31 (in a leap year). Calculation of an interest payment for a 
fixed-principal note with a par amount of $1,000 and an interest 
rate of 8% is made in

[[Page 45214]]

this manner: ($1,000 x .08) / 2 = $40. Specifically, a semiannual 
interest payment represents one half of one year's interest, and is 
computed on this basis regardless of the actual number of days in 
the half-year.
    2. Daily Interest Decimal. We compute a daily interest decimal 
in cases where an interest payment period for a fixed-principal 
security is shorter or longer than six months or where accrued 
interest is payable by an investor. We base the daily interest 
decimal on the actual number of calendar days in the half-year or 
half-years involved. The number of days in any half-year period is 
shown in Table 1.

                                                     Table 1
----------------------------------------------------------------------------------------------------------------
                                                   Beginning and ending days are   Beginning and ending days are
                                                     1st or 15th of the months      the last days of the months
                                                   listed under interest period    listed under interest period
                 Interest period                         (number of days)                (number of days)
                                                 ---------------------------------------------------------------
                                                   Regular year      Leap year     Regular year      Leap year
----------------------------------------------------------------------------------------------------------------
January to July.................................             181             182             181             182
February to August..............................             181             182             184             184
March to September..............................             184             184             183             183
April to October................................             183             183             184             184
May to November.................................             184             184             183             183
June to December................................             183             183             184             184
July to January.................................             184             184             184             184
August to February..............................             184             184             181             182
September to March..............................             181             182             182             183
October to April................................             182             183             181             182
November to May.................................             181             182             182             183
December to June................................             182             183             181             182
----------------------------------------------------------------------------------------------------------------

    Table 2 below shows the daily interest decimals covering 
interest from \1/8\% to 20% on $1,000 for one day in increments of 
\1/8\ of one percent. These decimals represent \1/181\, \1/182\, \1/
183\, or \1/184\ of a full semiannual interest payment, depending on 
which half-year is applicable.

                                                                         Table 2
 [Decimal for one day's interest on $1,000 at various rates of interest, payable semiannually or on a semiannual basis, in regular years of 365 days and
                                      in years of 366 days (to determine applicable number of days, see table 1.)]
--------------------------------------------------------------------------------------------------------------------------------------------------------
              Rate per annum (percent)                 Half-year of 184 days    Half-year of 183 days    Half-year of 182 days    Half-year of 181 days
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1/8\...............................................              0.003396739              0.003415301              0.003434066              0.003453039
\1/4\...............................................              0.006793478              0.006830601              0.006868132              0.006906077
\3/8\...............................................              0.010190217              0.010245902              0.010302198              0.010359116
\1/2\...............................................              0.013586957              0.013661202              0.013736264              0.013812155
\5/8\...............................................              0.016983696              0.017076503              0.017170330              0.017265193
\3/4\...............................................              0.020380435              0.020491803              0.020604396              0.020718232
\7/8\...............................................              0.023777174              0.023907104              0.024038462              0.024171271
1...................................................              0.027173913              0.027322404              0.027472527              0.027624309
1\1/8\..............................................              0.030570652              0.030737705              0.030906593              0.031077348
1\1/4\..............................................              0.033967391              0.034153005              0.034340659              0.034530387
1\3/8\..............................................              0.037364130              0.037568306              0.037774725              0.037983425
1\1/2\..............................................              0.040760870              0.040983607              0.041208791              0.041436464
1\5/8\..............................................              0.044157609              0.044398907              0.044642857              0.044889503
1\3/4\..............................................              0.047554348              0.047814208              0.048076923              0.048342541
1\7/8\..............................................              0.050951087              0.051229508              0.051510989              0.051795580
2...................................................              0.054347826              0.054644809              0.054945055              0.055248619
2\1/8\..............................................              0.057744565              0.058060109              0.058379121              0.058701657
2\1/4\..............................................              0.061141304              0.061475410              0.061813187              0.062154696
2\3/8\..............................................              0.064538043              0.064890710              0.065247253              0.065607735
2\1/2\..............................................              0.067934783              0.068306011              0.068681319              0.069060773
2\5/8\..............................................              0.071331522              0.071721311              0.072115385              0.072513812
2\3/4\..............................................              0.074728261              0.075136612              0.075549451              0.075966851
2\7/8\..............................................              0.078125000              0.078551913              0.078983516              0.079419890
3...................................................              0.081521739              0.081967213              0.082417582              0.082872928
3\1/8\..............................................              0.084918478              0.085382514              0.085851648              0.086325967
3\1/4\..............................................              0.088315217              0.088797814              0.089285714              0.089779006
3\3/8\..............................................              0.091711957              0.092213115              0.092719780              0.093232044
3\1/2\..............................................              0.095108696              0.095628415              0.096153846              0.096685083
3\5/8\..............................................              0.098505435              0.099043716              0.099587912              0.100138122
3\3/4\..............................................              0.101902174              0.102459016              0.103021978              0.103591160
3\7/8\..............................................              0.105298913              0.105874317              0.106456044              0.107044199
4...................................................              0.108695652              0.109289617              0.109890110              0.110497238
4\1/8\..............................................              0.112092391              0.112704918              0.113324176              0.113950276
4\1/4\..............................................              0.115489130              0.116120219              0.116758242              0.117403315
4\3/8\..............................................              0.118885870              0.119535519              0.120192308              0.120856354
4\1/2\..............................................              0.122282609              0.122950820              0.123626374              0.124309392
4\5/8\..............................................              0.125679348              0.126366120              0.127060440              0.127762431

[[Page 45215]]

 
4\3/4\..............................................              0.129076087              0.129781421              0.130494505              0.131215470
4\7/8\..............................................              0.132472826              0.133196721              0.133928571              0.134668508
5...................................................              0.135869565              0.136612022              0.137362637              0.138121547
5\1/8\..............................................              0.139266304              0.140027322              0.140796703              0.141574586
5\1/4\..............................................              0.142663043              0.143442623              0.144230769              0.145027624
5\3/8\..............................................              0.146059783              0.146857923              0.147664835              0.148480663
5\1/2\..............................................              0.149456522              0.150273224              0.151098901              0.151933702
5\5/8\..............................................              0.152853261              0.153688525              0.154532967              0.155386740
5\3/4\..............................................              0.156250000              0.157103825              0.157967033              0.158839779
5\7/8\..............................................              0.159646739              0.160519126              0.161401099              0.162292818
6...................................................              0.163043478              0.163934426              0.164835165              0.165745856
6\1/8\..............................................              0.166440217              0.167349727              0.168269231              0.169198895
6\1/4\..............................................              0.169836957              0.170765027              0.171703297              0.172651934
6\3/8\..............................................              0.173233696              0.174180328              0.175137363              0.176104972
6\1/2\..............................................              0.176630435              0.177595628              0.178571429              0.179558011
6\5/8\..............................................              0.180027174              0.181010929              0.182005495              0.183011050
6\3/4\..............................................              0.183423913              0.184426230              0.185439560              0.186464088
6\7/8\..............................................              0.186820652              0.187841530              0.188873626              0.189917127
7...................................................              0.190217391              0.191256831              0.192307692              0.193370166
7\1/8\..............................................              0.193614130              0.194672131              0.195741758              0.196823204
7\1/4\..............................................              0.197010870              0.198087432              0.199175824              0.200276243
7\3/8\..............................................              0.200407609              0.201502732              0.202609890              0.203729282
7\1/2\..............................................              0.203804348              0.204918033              0.206043956              0.207182320
7\5/8\..............................................              0.207201087              0.208333333              0.209478022              0.210635359
7\3/4\..............................................              0.210597826              0.211748634              0.212912088              0.214088398
7\7/8\..............................................              0.213994565              0.215163934              0.216346154              0.217541436
8...................................................              0.217391304              0.218579235              0.219780220              0.220994475
8\1/8\..............................................              0.220788043              0.221994536              0.223214286              0.224447514
8\1/4\..............................................              0.224184783              0.225409836              0.226648352              0.227900552
8\3/8\..............................................              0.227581522              0.228825137              0.230082418              0.231353591
8\1/2\..............................................              0.230978261              0.232240437              0.233516484              0.234806630
8\5/8\..............................................              0.234375000              0.235655738              0.236950549              0.238259669
8\3/4\..............................................              0.237771739              0.239071038              0.240384615              0.241712707
8\7/8\..............................................              0.241168478              0.242486339              0.243818681              0.245165746
9...................................................              0.244565217              0.245901639              0.247252747              0.248618785
9\1/8\..............................................              0.247961957              0.249316940              0.250686813              0.252071823
9\1/4\..............................................              0.251358696              0.252732240              0.254120879              0.255524862
9\3/8\..............................................              0.254755435              0.256147541              0.257554945              0.258977901
9\1/2\..............................................              0.258152174              0.259562842              0.260989011              0.262430939
9\5/8\..............................................              0.261548913              0.262978142              0.264423077              0.265883978
9\3/4\..............................................              0.264945652              0.266393443              0.267857143              0.269337017
9\7/8\..............................................              0.268342391              0.269808743              0.271291209              0.272790055
10..................................................              0.271739130              0.273224044              0.274725275              0.276243094
10\1/8\.............................................              0.275135870              0.276639344              0.278159341              0.279696133
10\1/4\.............................................              0.278532609              0.280054645              0.281593407              0.283149171
10\3/8\.............................................              0.281929348              0.283469945              0.285027473              0.286602210
10\1/2\.............................................              0.285326087              0.286885246              0.288461538              0.290055249
10\5/8\.............................................              0.288722826              0.290300546              0.291895604              0.293508287
10\3/4\.............................................              0.292119565              0.293715847              0.295329670              0.296961326
10\7/8\.............................................              0.295516304              0.297131148              0.298763736              0.300414365
11..................................................              0.298913043              0.300546448              0.302197802              0.303867403
11\1/8\.............................................              0.302309783              0.303961749              0.305631868              0.307320442
11\1/4\.............................................              0.305706522              0.307377049              0.309065934              0.310773481
11\3/8\.............................................              0.309103261              0.310792350              0.312500000              0.314226519
11\1/2\.............................................              0.312500000              0.314207650              0.315934066              0.317679558
11\5/8\.............................................              0.315896739              0.317622951              0.319368132              0.321132597
11\3/4\.............................................              0.319293478              0.321038251              0.322802198              0.324585635
11\7/8\.............................................              0.322690217              0.324453552              0.326236264              0.328038674
12..................................................              0.326086957              0.327868852              0.329670330              0.331491713
12\1/8\.............................................              0.329483696              0.331284153              0.333104396              0.334944751
12\1/4\.............................................              0.332880435              0.334699454              0.336538462              0.338397790
12\3/8\.............................................              0.336277174              0.338114754              0.339972527              0.341850829
12\1/2\.............................................              0.339673913              0.341530055              0.343406593              0.345303867
12\5/8\.............................................              0.343070652              0.344945355              0.346840659              0.348756906
12\3/4\.............................................              0.346467391              0.348360656              0.350274725              0.352209945
12\7/8\.............................................              0.349864130              0.351775956              0.353708791              0.355662983
13..................................................              0.353260870              0.355191257              0.357142857              0.359116022
13\1/8\.............................................              0.356657609              0.358606557              0.360576923              0.362569061
13\1/4\.............................................              0.360054348              0.362021858              0.364010989              0.366022099
13\3/8\.............................................              0.363451087              0.365437158              0.367445055              0.369475138

[[Page 45216]]

 
13\1/2\.............................................              0.366847826              0.368852459              0.370879121              0.372928177
13\5/8\.............................................              0.370244565              0.372267760              0.374313187              0.376381215
13\3/4\.............................................              0.373641304              0.375683060              0.377747253              0.379834254
13\7/8\.............................................              0.377038043              0.379098361              0.381181319              0.383287293
14..................................................              0.380434783              0.382513661              0.384615385              0.386740331
14\1/8\.............................................              0.383831522              0.385928962              0.388049451              0.390193370
14\1/4\.............................................              0.387228261              0.389344262              0.391483516              0.393646409
14\3/8\.............................................              0.390625000              0.392759563              0.394917582              0.397099448
14\1/2\.............................................              0.394021739              0.396174863              0.398351648              0.400552486
14\5/8\.............................................              0.397418478              0.399590164              0.401785714              0.404005525
14\3/4\.............................................              0.400815217              0.403005464              0.405219780              0.407458564
14\7/8\.............................................              0.404211957              0.406420765              0.408653846              0.410911602
15..................................................              0.407608696              0.409836066              0.412087912              0.414364641
15\1/8\.............................................              0.411005435              0.413251366              0.415521978              0.417817680
15\1/4\.............................................              0.414402174              0.416666667              0.418956044              0.421270718
15\3/8\.............................................              0.417798913              0.420081967              0.422390110              0.424723757
15\1/2\.............................................              0.421195652              0.423497268              0.425824176              0.428176796
15\5/8\.............................................              0.424592391              0.426912568              0.429258242              0.431629834
15\3/4\.............................................              0.427989130              0.430327869              0.432692308              0.435082873
15\7/8\.............................................              0.431385870              0.433743169              0.436126374              0.438535912
16..................................................              0.434782609              0.437158470              0.439560440              0.441988950
16\1/8\.............................................              0.438179348              0.440573770              0.442994505              0.445441989
16\1/4\.............................................              0.441576087              0.443989071              0.446428571              0.448895028
16\3/8\.............................................              0.444972826              0.447404372              0.449862637              0.452348066
16\1/2\.............................................              0.448369565              0.450819672              0.453296703              0.455801105
16\5/8\.............................................              0.451766304              0.454234973              0.456730769              0.459254144
16\3/4\.............................................              0.455163043              0.457650273              0.460164835              0.462707182
16\7/8\.............................................              0.458559783              0.461065574              0.463598901              0.466160221
17..................................................              0.461956522              0.464480874              0.467032967              0.469613260
17\1/8\.............................................              0.465353261              0.467896175              0.470467033              0.473066298
17\1/4\.............................................              0.468750000              0.471311475              0.473901099              0.476519337
17\3/8\.............................................              0.472146739              0.474726776              0.477335165              0.479972376
17\1/2\.............................................              0.475543478              0.478142077              0.480769231              0.483425414
17\5/8\.............................................              0.478940217              0.481557377              0.484203297              0.486878453
17\3/4\.............................................              0.482336957              0.484972678              0.487637363              0.490331492
17\7/8\.............................................              0.485733696              0.488387978              0.491071429              0.493784530
18..................................................              0.489130435              0.491803279              0.494505495              0.497237569
18\1/8\.............................................              0.492527174              0.495218579              0.497939560              0.500690608
18\1/4\.............................................              0.495923913              0.498633880              0.501373626              0.504143646
18\3/8\.............................................              0.499320652              0.502049180              0.504807692              0.507596685
18\1/2\.............................................              0.502717391              0.505464481              0.508241758              0.511049724
18\5/8\.............................................              0.506114130              0.508879781              0.511675824              0.514502762
18\3/4\.............................................              0.509510870              0.512295082              0.515109890              0.517955801
18\7/8\.............................................              0.512907609              0.515710383              0.518543956              0.521408840
19..................................................              0.516304348              0.519125683              0.521978022              0.524861878
19\1/8\.............................................              0.519701087              0.522540984              0.525412088              0.528314917
19\1/4\.............................................              0.523097826              0.525956284              0.528846154              0.531767956
19\3/8\.............................................              0.526494565              0.529371585              0.532280220              0.535220994
19\1/2\.............................................              0.529891304              0.532786885              0.535714286              0.538674033
19\5/8\.............................................              0.533288043              0.536202186              0.539148352              0.542127072
19\3/4\.............................................              0.536684783              0.539617486              0.542582418              0.545580110
19\7/8\.............................................              0.540081522              0.543032787              0.546016484              0.549033149
20..................................................              0.543478261              0.546448087              0.549450549              0.552486188
--------------------------------------------------------------------------------------------------------------------------------------------------------

    3. Short First Payment Period. In cases where the first interest 
payment period for a Treasury fixed-principal security covers less 
than a full half-year period (a ``short coupon''), we multiply the 
daily interest decimal by the number of days from, but not 
including, the issue date to, and including, the first interest 
payment date. This calculation results in the amount of the interest 
payable per $1,000 par amount. In cases where the par amount of 
securities is a multiple of $1,000, we multiply the appropriate 
multiple by the unrounded interest payment amount per $1,000 par 
amount.

Example

    A 2-year note paying 8\3/8\% interest was issued on July 2, 
1990, with the first interest payment on December 31, 1990. The 
number of days in the full half-year period of June 30 to December 
31, 1990, was 184 (See Table 1.). The number of days for which 
interest actually accrued was 182 (not including July 2, but 
including December 31). The daily interest decimal, $0.227581522 
(See Table 2, line for 8\3/8\%, under the column for half-year of 
184 days.), was multiplied by 182, resulting in a payment of 
$41.419837004 per $1,000. For $20,000 of these notes, $41.419837004 
would be multiplied by 20, resulting in a payment of $828.39674008 
($828.40).
    4. Long First Payment Period. In cases where the first interest 
payment period for a bond or note covers more than a full half-year 
period (a ``long coupon''), we multiply the daily interest decimal 
by the number of days from, but not including, the issue date to, 
and including, the last day of the fractional period that ends one 
full half-year before the

[[Page 45217]]

interest payment date. We add that amount to the regular interest 
amount for the full half-year ending on the first interest payment 
date, resulting in the amount of interest payable for $1,000 par 
amount. In cases where the par amount of securities is a multiple of 
$1,000, the appropriate multiple should be applied to the unrounded 
interest payment amount per $1,000 par amount.

Example

    A 5-year 2-month note paying 7\7/8\% interest was issued on 
December 3, 1990, with the first interest payment due on August 15, 
1991. Interest for the regular half-year portion of the payment was 
computed to be $39.375 per $1,000 par amount. The fractional portion 
of the payment, from December 3 to February 15, fell in a 184-day 
half-year (August 15, 1990, to February 15, 1991). Accordingly, the 
daily interest decimal for 7\7/8\% was $0.213994565. This decimal, 
multiplied by 74 (the number of days from but not including December 
3, 1990, to and including February 15), resulted in interest for the 
fractional portion of $15.835597810. When added to $39.375 (the 
normal interest payment portion ending on August 15, 1991), this 
produced a first interest payment of $55.210597810, or $55.21 per 
$1,000 par amount. For $7,000 par amount of these notes, 
$55.210597810 would be multiplied by 7, resulting in an interest 
payment of $386.474184670 ($386.47).

B. Treasury Inflation-Protected Securities

    1. Indexing Process. We pay interest on marketable Treasury 
inflation-protected securities on a semiannual basis. We issue 
inflation-protected securities with a stated rate of interest that 
remains constant until maturity. Interest payments are based on the 
security's inflation-adjusted principal at the time we pay interest. 
We make this adjustment by multiplying the par amount of the 
security by the applicable Index Ratio.
    2. Index Ratio. The numerator of the Index Ratio, the Ref 
CPIDate, is the index number applicable for a specific 
day. The denominator of the Index Ratio is the Ref CPI applicable 
for the original issue date. However, when the dated date is 
different from the original issue date, the denominator is the Ref 
CPI applicable for the dated date. The formula for calculating the 
Index Ratio is:
[GRAPHIC] [TIFF OMITTED] TR28JY04.000

Where Date = valuation date

    3. Reference CPI. The Ref CPI for the first day of any calendar 
month is the CPI for the third preceding calendar month. For 
example, the Ref CPI applicable to April 1 in any year is the CPI 
for January, which is reported in February. We determine the Ref CPI 
for any other day of a month by a linear interpolation between the 
Ref CPI applicable to the first day of the month in which the day 
falls (in the example, January) and the Ref CPI applicable to the 
first day of the next month (in the example, February). For 
interpolation purposes, we truncate calculations with regard to the 
Ref CPI and the Index Ratio for a specific date to six decimal 
places, and round to five decimal places.
    Therefore the Ref CPI and the Index Ratio for a particular date 
will be expressed to five decimal places.
    (i) The formula for the Ref CPI for a specific date is:
    [GRAPHIC] [TIFF OMITTED] TR28JY04.001
    
Where Date = valuation date

D = the number of days in the month in which Date falls
t = the calendar day corresponding to Date
CPIM = CPI reported for the calendar month M by the 
Bureau of Labor Statistics
Ref CPIM = Ref CPI for the first day of the calendar 
month in which Date falls, e.g., Ref CPIApril1 is the 
CPIJanuary
Ref CPIM+1 = Ref CPI for the first day of the calendar 
month immediately following Date

    (ii) For example, the Ref CPI for April 15, 1996 is calculated 
as follows:
[GRAPHIC] [TIFF OMITTED] TR28JY04.002

where D = 30, t = 15
Ref CPIApril 1, 1996 = 154.40, the non-seasonally 
adjusted CPI-U for January 1996.

Ref CPIMay 1, 1996 = 154.90, the non-seasonally adjusted 
CPI-U for February 1996.

    (iii) Putting these values in the equation in paragraph (ii) 
above:
[GRAPHIC] [TIFF OMITTED] TR28JY04.003

    This value truncated to six decimals is 154.633333; rounded to 
five decimals it is 154.63333.
    (iv) To calculate the Index Ratio for April 16, 1996, for an 
inflation-protected security issued on April 15, 1996, the Ref 
CPIApril 16, 1996 must first be calculated. Using the 
same values in the equation above except that t=16, the Ref 
CPIApril 16, 1996 is 154.65000.
    The Index Ratio for April 16, 1996 is:

Index RatioApril 16, 1996 = 154.65000/154.63333 = 
1.000107803.

    This value truncated to six decimals is 1.000107; rounded to 
five decimals it is 1.00011.
    4. Index Contingencies.
    (i) If a previously reported CPI is revised, we will continue to 
use the previously reported (unrevised) CPI in calculating the 
principal value and interest payments.
    If the CPI is rebased to a different year, we will continue to 
use the CPI based on the base reference period in effect when the 
security was first issued, as long as that CPI continues to be 
published.
    (ii) We will replace the CPI with an appropriate alternative 
index if, while an inflation-protected security is outstanding, the 
applicable CPI is:
     Discontinued,
     In the judgment of the Secretary, fundamentally altered 
in a manner materially adverse to the interests of an investor in 
the security, or
     In the judgment of the Secretary, altered by 
legislation or Executive Order in a manner materially adverse to the 
interests of an investor in the security.
    (iii) If we decide to substitute an alternative index we will 
consult with the Bureau of Labor Statistics or any successor agency. 
We will then notify the public of the substitute index and how we 
will apply it. Determinations of the Secretary in this regard will 
be final.
    (iv) If the CPI for a particular month is not reported by the 
last day of the following month, we will announce an index number 
based on the last available twelve-month

[[Page 45218]]

change in the CPI. We will base our calculations of our payment 
obligations that rely on that month's CPI on the index number we 
announce.
    (a) For example, if the CPI for month M is not reported timely, 
the formula for calculating the index number to be used is:
[GRAPHIC] [TIFF OMITTED] TR28JY04.004

    (b) Generalizing for the last reported CPI issued N months prior 
to month M:
[GRAPHIC] [TIFF OMITTED] TR28JY04.005

    (c) If it is necessary to use these formulas to calculate an 
index number, we will use that number for all subsequent 
calculations that rely on the month's index number. We will not 
replace it with the actual CPI when it is reported, except for use 
in the above formulas. If it becomes necessary to use the above 
formulas to derive an index number, we will use the last CPI that 
has been reported to calculate CPI numbers for months for which the 
CPI has not been reported timely.
    5. Computation of Interest for a Regular Half-Year Payment 
Period. Interest on marketable Treasury inflation-protected 
securities is payable on a semiannual basis. The regular interest 
payment period is a full half-year or six calendar months. Examples 
of half-year periods are January 15 to July 15, and April 15 to 
October 15. An interest payment will be a fixed percentage of the 
value of the inflation-adjusted principal, in current dollars, for 
the date on which it is paid. We will calculate interest payments by 
multiplying one-half of the specified annual interest rate for the 
inflation-protected securities by the inflation-adjusted principal 
for the interest payment date.
    Specifically, we compute a semiannual interest payment on the 
basis of one-half of one year's interest regardless of the actual 
number of days in the half-year.

Example

    A 10-year inflation-protected note paying 3\7/8%\ interest was 
issued on January 15, 1999, with the first interest payment on July 
15, 1999. The Ref CPI on January 15, 1999 (Ref 
CPIIssueDate) was 164, and the Ref CPI on July 15, 1999 
(Ref CPIDate) was 166.2. For a par amount of $100,000, 
the inflation-adjusted principal on July 15, 1999, was (166.2/164) x 
$100,000, or $101,341. This amount was multiplied by .03875/2, or 
.019375, resulting in a payment of $1,963.48.

C. Accrued Interest

    1. You will have to pay accrued interest on a Treasury bond or 
note when interest accrues prior to the issue date of the security. 
Because you receive a full interest payment despite having held the 
security for only a portion of the interest payment period, you must 
compensate us through the payment of accrued interest at settlement.
    2. For a Treasury fixed-principal security, if accrued interest 
covers a fractional portion of a full half-year period, the number 
of days in the full half-year period and the stated interest rate 
will determine the daily interest decimal to use in computing the 
accrued interest. We multiply the decimal by the number of days for 
which interest has accrued.
    3. If a reopened bond or note has a long first interest payment 
period (a ``long coupon''), and the dated date for the reopened 
issue is less than six full months before the first interest 
payment, the accrued interest will fall into two separate half-year 
periods. A separate daily interest decimal must be multiplied by the 
respective number of days in each half-year period during which 
interest has accrued.
    4. We round all accrued interest computations to five decimal 
places for a $1,000 par amount, using normal rounding procedures. We 
calculate accrued interest for a par amount of securities greater 
than $1,000 by applying the appropriate multiple to accrued interest 
payable for $1,000 par amount, rounded to five decimal places.
    5. For an inflation-protected security, we calculate accrued 
interest as shown in section III, paragraphs A and B of this 
appendix.
    Examples. (1) Treasury Fixed-Principal Securities--(i) Involving 
One Half-Year: A note paying interest at a rate of 6\3/4%\, 
originally issued on May 15, 2000, as a 5-year note with a first 
interest payment date of November 15, 2000, was reopened as a 4-year 
9-month note on August 15, 2000. Interest had accrued for 92 days, 
from May 15 to August 15. The regular interest period from May 15 to 
November 15, 2000, covered 184 days. Accordingly, the daily interest 
decimal, $0.183423913, multiplied by 92, resulted in accrued 
interest payable of $16.874999996, or $16.87500, for each $1,000 
note purchased. If the notes have a par amount of $150,000, then 150 
is multiplied by $16.87500, resulting in an amount payable of 
$2,531.25.
    (2) Involving Two Half-Years:
    A 10\3/4%\ bond, originally issued on July 2, 1985, as a 20-year 
1-month bond, with a first interest payment date of February 15, 
1986, was reopened as a 19-year 10-month bond on November 4, 1985. 
Interest had accrued for 44 days, from July 2 to August 15, 1985, 
during a 181-day half-year (February 15 to August 15); and for 81 
days, from August 15 to November 4, during a 184-day half-year 
(August 15, 1985, to February 15, 1986). Accordingly, $0.296961326 
was multiplied by 44, and $0.292119565 was multiplied by 81, 
resulting in products of $13.066298344 and $23.661684765 which, 
added together, resulted in accrued interest payable of 
$36.727983109, or $36.72798, for each $1,000 bond purchased. If the 
bonds have a par amount of $11,000, then 11 is multiplied by 
$36.72798, resulting in an amount payable of $404.00778 ($404.01).

II. Formulas for Conversion of Fixed-Principal Security Yields to 
Equivalent Prices

Definitions

P = price per 100 (dollars), rounded to three places, using normal 
rounding procedures
C = the regular annual interest per $100, payable semiannually, 
e.g., 6.125 (the decimal equivalent of a 6-\1/8%\ interest rate)
i = nominal annual rate of return or yield to maturity, based on 
semiannual interest payments and expressed in decimals, e.g., .0719
n = number of full semiannual periods from the issue date to 
maturity, except that, if the issue date is a coupon frequency date, 
n will be one less than the number of full semiannual periods 
remaining to maturity. Coupon frequency dates are the two semiannual 
dates based on the maturity date of each note or bond issue. For 
example, a security maturing on November 15, 2015, would have coupon 
frequency dates of May 15 and November 15.
r = (1) number of days from the issue date to the first interest 
payment (regular or short first payment period), or (2) number of 
days in fractional portion (or ``initial short period'') of long 
first payment period
s = (1) number of days in the full semiannual period ending on the 
first interest payment date (regular or short first payment period), 
or (2) number of days in the full semiannual period in which the 
fractional portion of a long first payment period falls, ending at 
the onset of the regular portion of the first interest payment
vn = 1/[1 + (i/2)] n = present value of 1 due 
at the end of n periods
ann[]
 = (1-v\n\) / (i/2) = v + v\2\ + v\3\ + ... + vn = 
present value of 1 per period for n periods
A = accrued interest
    A. For fixed-principal securities with a regular first interest 
payment period:

Formula:

P[1 + (r/s)(i/2)] = (C/2)(r/s) + (C/2) 
an[] 
+ 100 vn
Example:

For an 8\3/4%\ 30-year bond issued May 15, 1990, due May 15, 2020, 
with interest payments on November 15 and May 15, solve for the 
price per 100 (P) at a yield of 8.84%.

Definitions:

C = 8.75
i = .0884
r = 184 (May 15 to November 15, 1990)
s = 184 (May 15 to November 15, 1990)
n = 59 (There are 60 full semiannual periods, but n is reduced by 1 
because the issue date is a coupon frequency date.)
vn = 1/[(1 + .0884/2)]59, or .077940
an[] 
= (1-.077940)/.0442, or 20.861086

Resolution:

P[1 + (r/s)(i/2)] = (C/2)(r/s) + (C/2) 
an[] 
+ 100 vn or
P[1 + (184/184)(.0884/2)] = (8.75/2)(184/184) + (8.75/2)(20.861086) 
+ 100(.077940)
(1) P[1 + .0442] = 4.375 + 91.267251 + 7.7940
(2) P[1.0442] = 103.436251
(3) P = 103.436251/1.0442
(4) P = 99.057892
(5) P = 99.058
    B. For fixed-principal securities with a short first interest 
payment period:
Formula:

P[1 + (r/s)(i/2)] = (C/2)(r/s) + (C/2) 
an[] 
+ 100 vn


[[Page 45219]]


Example:

For an 8\1/2\% 2-year note issued April 2, 1990, due March 31, 1992, 
with interest payments on September 30 and March 31, solve for the 
price per 100 (P) at a yield of 8.59%.

Definitions:

C = 8.50
i = .0859
n = 3
r = 181 (April 2 to September 30, 1990)
s = 183 (March 31 to September 30, 1990)
vn = 1 / [(1 + .0859/2)]\3\, or .881474
an[] 
= (1-.881474)/.04295, or 2.759627

Resolution:

P[1 + (r/s)(i/2)] = (C/2)(r/s) + (C/2) 
an[] 
+ 100 vn or
P[1 + (181/183)(.0859/2)] = (8.50/2)(181/183) + (8.50/2)(2.759627) + 
100(.881474)
(1) P[1 + .042481] = 4.203552 + 11.728415 + 88.1474
(2) P[1.042481] = 104.079367
(3) P = 104.079367 / 1.042481
(4) P = 99.838143
(5) P = 99.838

    C. For fixed-principal securities with a long first interest 
payment period:
Formula:

P[1 + (r/s)(i/2)] = [(C/2)(r/s)]v + (C/2) 
an[] 
+ 100 vn

Example:

For an 8\1/2\% 5-year 2-month note issued March 1, 1990, due May 15, 
1995, with interest payments on November 15 and May 15 (first 
payment on November 15, 1990), solve for the price per 100 (P) at a 
yield of 8.53%.

Definitions:
C = 8.50
i = .0853
n = 10
r = 75 (March 1 to May 15, 1990, which is the fractional portion of 
the first interest payment)
s = 181 (November 15, 1989, to May 15, 1990)
v = 1/(1+.0853/2), or .959095
vn = 1/(1+.0853/2)10, or .658589
an[] 
= (1-.658589)/.04265, or 8.004947

Resolution:

P[1 + (r/s)(i/2)] = [(C/2)(r/s)]v + (C/2) 
an[] 
+ 100 vn or
P[1 + (75/181)(.0853/2)] = [(8.50/2)(75/181)].959095 + (8.50/
2)(8.004947) + 100(.658589)
(1) P[1 + .017673] = 1.689014 + 34.021025 + 65.8589
(2) P[1.017673] = 101.568939
(3) P = 101.568939 / 1.017673
(4) P = 99.805084
(5) P = 99.805

    D. (1) For fixed-principal securities reopened during a regular 
interest period where the purchase price includes predetermined 
accrued interest.
    (2) For new fixed-principal securities accruing interest from 
the coupon frequency date immediately preceding the issue date, with 
the interest rate established in the auction being used to determine 
the accrued interest payable on the issue date.

Formula:

(P + A)[1 + (r/s)(i/2)] = C/2 + (C/2) 
an[] 
+ 100 vn
Where: A = [(s-r)/s](C/2)

Example:

For a 9\1/2\% 10-year note with interest accruing from November 15, 
1985, issued November 29, 1985, due November 15, 1995, and interest 
payments on May 15 and November 15, solve for the price per 100 (P) 
at a yield of 9.54%. Accrued interest is from November 15 to 
November 29 (14 days).

Definitions:

C = 9.50
i = .0954
n = 19
r = 167 (November 29, 1985, to May 15, 1986)
s = 181 (November 15, 1985, to May 15, 1986)
vn = 1/[(1 + .0954/2)]\19\, or .412570400
    an[
] = (1-.412570) / .0477, or 12.315094
A = [(181-167) / 181](9.50 / 2), or .367403

Resolution:

(P+A)[1 + (r/s)(i/2)] = [(C/2) + (C/2) 
an[] 
+ 100 v\n\ or
(P + .367403)[1 + (167/181)(.0954/2)] = (9.50/2)+(9.50/2) 
(12.315094)+100(.412570)
(1) (P + .367403)[1 + .044011] = 4.75 + 58.496697 + 41.2570
(2) (P + .367403)[1.044011] = 104.503697
(3) (P + .367403) = 104.503697 / 1.044011
(4) (P + .367403) = 100.098272
(5) P = 100.098272-.367403
(6) P = 99.730869
(7) P = 99.731

    E. For fixed-principal securities reopened during the regular 
portion of a long first payment period:

Formula:

(P + A)[1 + (r/s)(i/2)] = (r'/s'')(C/2) + C/2 + (C/2) 
an[] 
+ 100 vn
Where:

A = AI' + AI
AI' = (r'/s'')(C/2)
AI = [(s-r)/s](C/2)

and
r = number of days from the reopening date to the first interest 
payment date

 s = number of days in the semiannual period for the regular portion 
of the first interest payment period
r' = number of days in the fractional portion (or ``initial short 
period'') of the first interest payment period
s = number of days in the semiannual period ending with 
thecommencement date of the regular portion of the first interest 
payment period

Example:

A 10\3/4\% 19-year 9-month bond due August 15, 2005, is issued on 
July 2, 1985, and reopened on November 4, 1985, with interest 
payments on February 15 and August 15 (first payment on February 15, 
1986), solve for the price per 100 (P) at a yield of 10.47%. Accrued 
interest is calculated from July 2 to November 4.

Definitions:

C = 10.75
i = .1047
n = 39
r = 103 (November 4, 1985, to February 15, 1986)
s = 184 (August 15, 1985, to February 15, 1986)
r' = 44 (July 2 to August 15, 1985)
s = 181 (February 15 to August 15, 1985)
vn = 1/[(1 + .1047/2)]39, or .136695
an[rceil] = (1-.136695)/.05235, or 16.491022
AI' = (44/181)(10.75/2), or 1.306630
AI = [(184-103)/184](10.75/2), or 2.366168
A = AI' + AI, or 3.672798

Resolution:

(P + A)[1 + (r/s)(i/2)] = (r'/s)(C/2) + C/2 + (C/2) 
an[rceil] + 100 vn or
(P + 3.672798)[1 + (103/184)(.1047/2)] = (44/181) (10.75/2) + 10.75/
2 + (10.75/2)(16.491022) + 100 (.136695)
(1) (P + 3.672798)[1 + .029305] = 1.306630 + 5.375 + 88.639243 + 
13.6695
(2) (P + 3.672798)[1.029305] = 108.990373
(3) (P + 3.672798) = 108.990373/1.029305
(4) (P + 3.672798) = 105.887344
(5) P = 105.887344-3.672798
(6) P = 102.214546
(7) P = 102.215

    F. For fixed-principal securities reopened during a short first 
payment period:

Formula:

(P + A)[1 + (r/s)(i/2)] = (r'/s)(C/2) + (C/2) an[rceil] + 
100 vn

    Where: A = [(r'-r)/s](C/2)

and r' = number of days from the original issue date to the first 
interest payment date

Example:

For a 10\1/2\% 8-year note due May 15, 1991, originally issued on 
May 16, 1983, and reopened on August 15, 1983, with interest 
payments on November 15 and May 15 (first payment on November 15, 
1983), solve for the price per 100 (P) at a yield of 10.53%. Accrued 
interest is calculated from May 16 to August 15.

Definitions:

C = 10.50
i = .1053
n = 15
r = 92 (August 15, 1983, to November 15, 1983)
s = 184 (May 15, 1983, to November 15, 1983)
r' = 183 (May 16, 1983, to November 15, 1983)
vn = 1/[(1 + .1053/2)]15, or .463170
an[rceil] = (1-.463170)/.05265, or 10.196201
A = [(183-92)/184](10.50/2), or 2.596467

Resolution:

(P + A)[1 + (r/s)(i/2)] = (r'/s)(C/2) + (C/2) an[rceil] + 
100 vn or
(P + 2.596467)[1 + (92/184)(.1053/2)] = (183/184)(10.50/2) + (10.50/
2)(10.196201) + 100 (.463170)
(1) (P + 2.596467)[1 + .026325] = 5.221467 + 53.530055 + 46.3170
(2) (P + 2.596467)[1.026325] = 105.068522
(3) (P + 2.596467) = 105.068522/1.026325
(4) (P + 2.596467) = 102.373539
(5) P = 102.373539-2.596467
(6) P = 99.777072
(7) P = 99.777

    G. For fixed-principal securities reopened during the fractional 
portion (initial short period) of a long first payment period:

Formula:

(P + A)[1 + (r/s)(i/2)] = [(r'/s)(C/2)]v + (C/2) 
an[rceil] + 100 vn
Where: A = [(r'-r)/s](C/2)

and


[[Page 45220]]


r = number of days from the reopening date to the end of the short 
period
r' = number of days in the short period
s = number of days in the semiannual period ending with the end of 
the short period

Example:

For a 9\3/4\% 6-year 2-month note due December 15, 1994, originally 
issued on October 15, 1988, and reopened on November 15, 1988, with 
interest payments on June 15 and December 15 (first payment on June 
15, 1989), solve for the price per 100 (P) at a yield of 9.79%. 
Accrued interest is calculated from October 15 to November 15.

Definitions:

C = 9.75
i = .0979
n = 12
r = 30 (November 15, 1988, to December 15, 1988)
s = 183 (June 15, 1988, to December 15, 1988)
r' = 61 (October 15, 1988, to December 15, 1988)
v = 1/(1 + .0979/2), or .953334
vn = [1/(1 + .0979/2)]12, or .563563
an[rceil] = (1-.563563)/.04895, or 8.915975
A = [(61-30)/183](9.75/2), or .825820

Resolution:

(P + A)[1 + (r/s)(i/2)] = [(r'/s)(C/2)]v + (C/2) 
an[rceil] + 100 vn or
(P + .825820)[1 + (30/183)(.0979/2)] = [(61/183)(9.75/2)](.953334) + 
(9.75/2)(8.915975) + 100(.563563)
(1) (P + .825820)[1+ .008025] = 1.549168 + 43.465378 + 56.3563
(2) (P + .825820)[1.008025] = 101.370846
(3) (P + .825820) = 101.370846/1.008025
(4) (P + .825820) = 100.563821
(5) P = 100.563821 - .825820
(6) P = 99.738001
(7) P = 99.738

III. Formulas for Conversion of Inflation-Protected Security Yields to 
Equivalent Prices

Definitions:

P = unadjusted or real price per 100 (dollars)
Padj = inflation adjusted price; P x Index 
RatioDate
A = unadjusted accrued interest per $100 original principal
Aadj = inflation adjusted accrued interest; A x Index 
RatioDate
SA = settlement amount including accrued interest in current dollars 
per $100 original principal; Padj + Aadj
r = days from settlement date to next coupon date
s = days in current semiannual period
i = real yield, expressed in decimals (e.g., 0.0325)
C = real annual coupon, payable semiannually, in terms of real 
dollars paid on $100 initial, or real, principal of the security
n = number of full semiannual periods from issue date to maturity 
date, except that, if the issue date is a coupon frequency date, n 
will be one less than the number of full semiannual periods 
remaining until maturity. Coupon frequency dates are the two 
semiannual dates based on the maturity date of each note or bond 
issue. For example, a security maturing on July 15, 2026 would have 
coupon frequency dates of January 15 and July 15.
v\n\ = 1/(1 + i/2)\n\ = present value of 1 due at the end of n 
periods
an[] 
= (1 -v\n\)/(i/2) = v + v\2\ + v\3\ + ... + v\n\
= present value of 1 per period for n periods
Date = valuation date
D = the number of days in the month in which Date falls
t = calendar day corresponding to Date
CPI = Consumer Price Index number
CPIM = CPI reported for the calendar month M by the 
Bureau of Labor Statistics
Ref CPIM = reference CPI for the first day of the 
calendar month in which Date falls, e.g., Ref CPIApril1 
is the CPIJanuary
Ref CPIM+1 = reference CPI for the first day of the 
calendar month immediately following Date
Ref CPIDate = Ref CPIM + [(t - 1)/D][Ref 
CPIM+1 - Ref CPIM]
Index RatioDate = Ref CPIDate/Ref 
CPIIssueDate

    A. For inflation-protected securities with a regular first 
interest payment period:

Formulas:
[GRAPHIC] [TIFF OMITTED] TR28JY04.006

Example:

We issued a 10-year inflation-protected note on January 15, 1999. 
The note was issued at a discount to yield of 3.898% (real). The 
note bears a 3-7/8% real coupon, payable on July 15 and January 15 
of each year. The base CPI index applicable to this note is 164. (We 
normally derive this number using the interpolative process 
described in Appendix B, section I, paragraph B.)

Definitions:

C = 3.875
i = 0.03898
n = 19 (There are 20 full semiannual periods but n is reduced by 1 
because the issue date is a coupon frequency date.)
r = 181 (January 15, 1999 to July 15, 1999)
s = 181 (January 15, 1999 to July 15, 1999)
Ref CPIDate = 164
Ref CPIIssueDate = 164

Resolution:

Index RatioDate = Ref CPIDate/Ref 
CPIIssueDate = 164/164 = 1
A = [(181 - 181)/181] x3.875/2 = 0
Aadj = 0 x 1 = 0
vn = 1/(1 + i/2)n = 1/(1 + .03898/
2)19 = 0.69298457
an[]=
 (1-vn)/(i/2) = (1-0.69298457)/(.03898/2) = 15.75245911

Formula:

[[Page 45221]]

[GRAPHIC] [TIFF OMITTED] TR28JY04.007


    Note: For the real price (P), we have rounded to three places. 
These amounts are based on 100 par value.

    B. (1) For inflation-protected securities reopened during a 
regular interest period where the purchase price includes 
predetermined accrued interest.
    (2) For new inflation-protected securities accruing interest 
from the coupon frequency date immediately preceding the issue date, 
with the interest rate established in the auction being used to 
determine the accrued interest payable on the issue date.
    Bidding: The dollar amount of each bid is in terms of the par 
amount. For example, if the Ref CPI applicable to the issue date of 
the note is 120, and the reference CPI applicable to the reopening 
issue date is 132, a bid of $10,000 will in effect be a bid of 
$10,000 x (130/120), or $11,000.

Formulas:
[GRAPHIC] [TIFF OMITTED] TR28JY04.008

Example:

We issued a 3\5/8\% 10-year inflation-protected note on January 15, 
1998, with interest payments on July 15 and January 15. For a 
reopening on October 15, 1998, with inflation compensation accruing 
from January 15, 1998 to October 15, 1998, and accrued interest 
accruing from July 15, 1998 to October 15, 1998 (92 days), solve for 
the price per 100 (P) at a real yield, as determined in the 
reopening auction, of 3.65%. The base index applicable to the issue 
date of this note is 161.55484 and the reference CPI applicable to 
October 15, 1998, is 163.29032.

Definitions:

C = 3.625
i = 0.0365
n = 18
r = 92 (October 15, 1998 to January 15, 1999)
s = 184 (July 15, 1998 to January 15, 1999)
Ref CPIDate = 163.29032
Ref CPIIssueDate = 161.55484

Resolution:

Index RatioDate = Ref CPIDate/Ref 
CPIIssueDate = 163.29032/161.55484 = 1.01074
vn = 1/(1 + i/2)n = 1/(1 + .0365/
2)18 = 0.72213844
an[] 
= (1-vn)/(i/2) = (1-0.72213844)/(.0365/2) = 15.22529106
Formula:

[[Page 45222]]

[GRAPHIC] [TIFF OMITTED] TR28JY04.009


    Note: For the real price (P), and the inflation-adjusted price 
(Padj), we have rounded to three places. For accrued 
interest (A) and the adjusted accrued interest (Aadj), we 
have rounded to six places. These amounts are based on 100 par 
value.

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

    Note: Valuing an interest component stripped from an inflation-
protected 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-protected 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-
protected security.

Definitions:

c = C/100 = the regular annual interest rate, payable semiannually, 
e.g., .03625 (the decimal equivalent of a 3\5/8\% interest rate)
Par = par amount of the security to be stripped
Ref CPIIssueDate = 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 CPIIssueDate) (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-protected note paying 3\7/8\% interest was 
issued on January 15, 1999, with the second interest payment on 
January 15, 2000. The Ref CPI of January 15, 1999 (Ref 
CPIIssueDate) was 164.00000, and the Ref CPI on January 
15, 2000 (Ref CPIDate) was 168.24516. Calculate the 
adjusted value and the payment amount at maturity of the interest 
component.

Definitions:

c = .03875
Par = $1,000,000
Ref CPIIssueDate = 164.00000
Ref CPIDate = 168.24516

Resolution:
For a par amount of $1 million, the adjusted value of each stripped 
interest component was $1,000,000(.03875/2)(100/164.00000), or 
$11,814.02 (no intermediate rounding).
For an interest component that matured on January 15, 2000, the 
payment amount was $11,814.02 (168.24516/100), or $19,876.52 (no 
intermediate rounding).

V. Computation of Purchase Price, Discount Rate, and Investment Rate 
(Coupon-Equivalent Yield) for Treasury Bills

    A. Conversion of the discount rate to a purchase price for 
Treasury bills of all maturities:
Formula:
P = 100 (1-dr/360)

Where:

d = discount rate, in decimals
r = number of days remaining to maturity
P = price per 100 (dollars)
Example:
For a bill issued November 24, 1989, due February 22, 1990, at a 
discount rate of 7.61%, solve for price per 100 (P).
Definitions:
d = .0761
r = 90 (November 24, 1989 to February 22, 1990)
Resolution:
P = 100 (1-dr/360)
(1) P = 100 [1-(.0761)(90)/360]
(2) P = 100 (1-.019025)
(3) P = 100 (.980975)
(4) P = 98.0975
(5) P = 98.098


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

    B. Computation of purchase prices and discount amounts based on 
price per $100, for Treasury bills of all maturities:
    1. To determine the purchase price of any bill, divide the par 
amount by 100 and multiply the resulting quotient by the price per 
$100.

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

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

Example:


[[Page 45223]]


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

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

Formula:
[GRAPHIC] [TIFF OMITTED] TR28JY04.010

Where:

 P = price per 100 (dollars)
d = discount rate
r = number of days remaining to maturity

Example:

For a 26-week bill issued December 30, 1982, due June 30, 1983, with 
a price of $95.930, solve for the discount rate (d).

Definitions:

P = 95.930
r = 182 (December 30, 1982, to June 30, 1983)

Resolution:
[GRAPHIC] [TIFF OMITTED] TR28JY04.011


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

    D. Calculation of investment rate (coupon-equivalent yield) for 
Treasury bills:
    1. For bills of not more than one half-year to maturity:
Formula:
[GRAPHIC] [TIFF OMITTED] TR28JY04.012

Where:

i = investment rate, in decimals
P = price per 100 (dollars)
r = number of days remaining to maturity
y = number of days in year following the issue date; normally 365 
but, if the year following the issue date includes February 29, then 
y is 366.

Example:

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

Definitions:

P = 99.559
r = 20 (June 1, 1990, to June 21, 1990)
y = 365

Resolution:
[GRAPHIC] [TIFF OMITTED] TR28JY04.013

    2. For bills of more than one half-year to maturity:

Formula:
P[1 + (r-y/2)(i/y)] (1 + i/2) = 100

    This formula must be solved by using the quadratic equation, 
which is:

ax2 + bx + c = 0

    Therefore, rewriting the bill formula in the quadratic equation 
form gives:
[GRAPHIC] [TIFF OMITTED] TR28JY04.014

and solving for ``i'' produces:
[GRAPHIC] [TIFF OMITTED] TR28JY04.015

Where:
i = investment rate in decimals
b = r/y
a = (r/2y)-.25
c = (P-100)/P
P = price per 100 (dollars)
r = number of days remaining to maturity
y = number of days in year following the issue date; normally 365, 
but if the year following the issue date includes February 29, then 
y is 366.

Example:

For a 52-week bill issued June 7, 1990, due June 6, 1991, with a 
price of $92.265 (computed from a discount rate of 7.65%), solve for 
the investment rate (i).

Definitions:

r = 364 (June 7, 1990, to June 6, 1991)
y = 365
P = 92.265
b = 364/365, or .997260
a = (364/730)-.25, or .24863
c = (92.265-100)/92.265, or -.083835

Resolution: i =
[GRAPHIC] [TIFF OMITTED] TR28JY04.016

Appendix C to Part 356--Investment Considerations

I. Inflation-Protected Securities

A. Principal and Interest Variability

    An investment in securities with principal or interest 
determined by reference to an inflation index involves factors not 
associated with an investment in a fixed-principal security. Such 
factors include the possibility that:
     The inflation index may be subject to significant 
changes,
     changes in the index may or may not correlate to 
changes in interest rates generally or with changes in other 
indices,
     the resulting interest may be greater or less than that 
payable on other securities of similar maturities, and
     in the event of sustained deflation, the amount of the 
semiannual interest payments, the inflation-adjusted principal of 
the security, and the value of stripped components will decrease. 
However, if at maturity the inflation-adjusted principal is less 
than a security's par amount, we will pay an additional amount so 
that the additional amount plus the inflation-adjusted principal 
equals the par amount. Regardless of whether

[[Page 45224]]

or not we pay such an additional amount, we will always base 
interest payments on the inflation-adjusted principal as of the 
interest payment date. If a security has been stripped, we will pay 
any such additional amount at maturity to holders of principal 
components only. (See Sec.  356.30.)

B. Trading in the Secondary Market

    The Treasury securities market is the largest and most liquid 
securities market in the world. The market for Treasury inflation-
protected securities, however, may not be as active or liquid as the 
market for Treasury fixed-principal securities. In addition, 
Treasury inflation-protected securities may not be as widely traded 
or as well understood as Treasury fixed-principal securities. Lesser 
liquidity and fewer market participants may result in larger spreads 
between bid and asked prices for inflation-protected securities than 
the bid-asked spreads for fixed-principal securities with the same 
time to maturity. Larger bid-asked spreads normally result in higher 
transaction costs and/or lower overall returns. The liquidity of an 
inflation-protected security may be enhanced over time as we issue 
additional amounts or more entities participate in the market.

C. Tax Considerations

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

D. Indexing Issues

    While the Consumer Price Index (``CPI'') measures changes in 
prices for goods and services, movements in the CPI that have 
occurred in the past do not necessarily indicate changes that may 
occur in the future.
    The calculation of the index ratio incorporates an approximate 
three-month lag, which may have an impact on the trading price of 
the securities, particularly during periods of significant, rapid 
changes in the index.
    The CPI is reported by the Bureau of Labor Statistics, a bureau 
within the Department of Labor. The Bureau of Labor Statistics 
operates independently of Treasury and, therefore, we have no 
control over the determination, calculation, or publication of the 
index. For a discussion of how we will apply the CPI in various 
situations, see Appendix B, Section I, Paragraph B of this part. In 
addition, for a discussion of actions that we would take in the 
event the CPI is: discontinued; in the judgment of the Secretary, 
fundamentally altered in a manner materially adverse to the 
interests of an investor in the security; or, in the judgment of the 
Secretary, altered by legislation or Executive Order in a manner 
materially adverse to the interests of an investor in the security, 
see Appendix B, Section I, Paragraph B.4 of this part.

Appendix D to Part 356--Description of the Consumer Price Index

    The Consumer Price Index (``CPI'') for purposes of inflation-
protected securities is the non-seasonally adjusted U.S. City 
Average All Items Consumer Price Index for All Urban Consumers. It 
is published monthly by the Bureau of Labor Statistics (BLS), a 
bureau within the Department of Labor. The CPI is a measure of the 
average change in consumer prices over time in a fixed market basket 
of goods and services. This market basket includes food, clothing, 
shelter, fuels, transportation, charges for doctors' and dentists' 
services, and drugs.
    In calculating the index, price changes for the various items 
are averaged together with weights that represent their importance 
in the spending of urban households in the United States. The BLS 
periodically updates the contents of the market basket of goods and 
services, and the weights assigned to the various items, to take 
into account changes in consumer expenditure patterns.
    The CPI is expressed in relative terms in relation to a time 
base reference period for which the level is set at 100. For 
example, if the CPI for the 1982-84 reference period is 100.0, an 
increase of 16.5 percent from that period would be shown as 116.5. 
The CPI for a particular month is released and published during the 
following month. From time to time, the CPI is rebased to a more 
recent base reference period. We provide the base reference period 
for a particular inflation-protected security on the auction 
announcement for that security.
    Further details about the CPI may be obtained by contacting the 
BLS.

    Dated: July 20, 2004.
Donald V. Hammond,
Fiscal Assistant Secretary.
[FR Doc. 04-17012 Filed 7-27-04; 8:45 am]
BILLING CODE 4810-39-P