[Federal Register Volume 89, Number 9 (Friday, January 12, 2024)]
[Rules and Regulations]
[Pages 2127-2132]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-00552]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9986]
RIN 1545-BQ57


Corporate Bond Yield Curve for Determining Present Value

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document sets forth final regulations specifying the 
methodology

[[Page 2128]]

for constructing the corporate bond yield curve that is used to derive 
the interest rates used in calculating present value and making other 
calculations under a defined benefit plan, as well as for discounting 
unpaid losses and estimated salvage recoverable of insurance companies. 
These regulations affect participants in, beneficiaries of, employers 
maintaining, and administrators of certain retirement plans, as well as 
insurance companies.

DATES: 
    Effective date: These regulations are effective January 12, 2024.
    Applicability date: These regulations apply for purposes of 
determining the corporate bond yield curve under section 430(h)(2)(D) 
of the Internal Revenue Code for months that begin on or after February 
1, 2024.

FOR FURTHER INFORMATION CONTACT: Arslan Malik or Linda S.F. Marshall, 
Office of Associate Chief Counsel (Employee Benefits, Exempt 
Organizations, and Employment Taxes) at (202) 317-6700 (not a toll-free 
number).

SUPPLEMENTARY INFORMATION:

Background

    Section 412 of the Internal Revenue Code (Code) prescribes minimum 
funding requirements for defined benefit pension plans. Section 430 
specifies the minimum funding requirements that apply generally to 
defined benefit plans that are not multiemployer plans.\1\ For a plan 
subject to section 430, section 430(a) defines the minimum required 
contribution for a plan year by reference to the plan's funding target 
for the plan year. Under section 430(d)(1), a plan's funding target for 
a plan year generally is the present value of all benefits accrued or 
earned under the plan as of the first day of that plan year.
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    \1\ Section 302 of the Employee Retirement Income Security Act 
of 1974, Public Law 93-406, 88 Stat. 829 (1974), as amended (ERISA), 
sets forth funding rules that are parallel to those in section 412 
of the Code, and section 303 of ERISA sets forth minimum funding 
requirements that apply generally for defined benefit plans (other 
than multiemployer plans) that are parallel to those in section 430 
of the Code. Pursuant to section 101 of Reorganization Plan No. 4 of 
1978, 5 U.S.C. App., as amended, the Secretary of the Treasury has 
interpretive jurisdiction over the subject matter addressed in these 
regulations for purposes of ERISA, as well as the Code. Thus, these 
Treasury regulations issued under section 430 of the Code also apply 
for purposes of section 303 of ERISA.
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    Section 430(h)(2) provides rules regarding the interest rates to be 
used under section 430. Section 430(h)(2)(B) provides that a plan's 
funding target and target normal cost for a plan year are determined 
using three interest rates: (1) the first segment rate, which applies 
to benefits reasonably determined to be payable during the 5-year 
period beginning on the valuation date; (2) the second segment rate, 
which applies to benefits reasonably determined to be payable during 
the next 15-year period; and (3) the third segment rate, which applies 
to benefits reasonably determined to be paid after that 15-year period. 
Under sections 430(h)(2)(C)(i) through (iii), each of these segment 
rates is determined for a month on the basis of the corporate bond 
yield curve for the month, taking into account only that portion of the 
yield curve that is based on bonds maturing during the period for which 
the segment rate is used.
    Section 430(h)(2)(C)(iv), which was added to the Code in 2012 by 
section 40211 of the Moving Ahead for Progress in the 21st Century Act, 
Public Law 112-141, 126 Stat. 405, and has been modified several times 
since then (most recently in 2021 by section 80602 of the 
Infrastructure Investment and Jobs Act, Pub. L. 117-58, 135 Stat. 429), 
provides interest rate stabilization rules under which the segment 
rates are constrained by reference to the 25-year average segment 
rates. Under section 430(h)(2)(C)(iv), if a segment rate for a month is 
less than the applicable minimum percentage, or more than the 
applicable maximum percentage, of the average of the corresponding 
segment rates for years in the 25-year period ending with September 30 
of the calendar year preceding the calendar year in which the plan year 
begins, then the segment rate for that month is equal to the applicable 
minimum percentage or the applicable maximum percentage of the 
corresponding 25-year average segment rate, whichever is closest. The 
last sentence of section 430(h)(2)(C)(iv)(I) provides that any 25-year 
average segment rate that is less than 5 percent is deemed to be 5 
percent.
    Under section 430(h)(2)(D)(i), the term ``corporate bond yield 
curve'' means, with respect to any month, a yield curve prescribed by 
the Secretary for the month that reflects the average, for the 24-month 
period ending with the month preceding such month, of monthly yields on 
investment grade corporate bonds with varying maturities and that are 
in the top three quality levels available. Section 430(h)(2)(D)(ii) 
permits a plan sponsor to elect to use the corporate bond yield curve, 
rather than the segment rates, to determine the plan's minimum required 
contribution. The yield curve that applies pursuant to this election is 
determined without regard to 24-month averaging. This election, once 
made, may be revoked only with the consent of the Secretary.
    Under section 430(h)(2)(F), the Secretary is instructed to publish 
for each month the corporate bond yield curve (without regard to the 
24-month averaging specification), the segment rates described in 
section 430(h)(2)(C), and the 25-year averages of segment rates used 
under section 430(h)(4)(C)(iv). The Secretary is also instructed to 
publish a description of the methodology used to determine the yield 
curve and segment rates which is sufficiently detailed to enable plans 
to make reasonable projections regarding the yield curve and segment 
rates for future months based on the plan's projection of future 
interest rates.
    Section 1.430(h)(2)-1 was issued in 2009 to provide rules regarding 
the interest rates to be used under section 430. T.D. 9467, 74 FR 
53004. Section 1.430(h)(2)-1(d) provides that the methodology for 
determining the yield curve is provided in guidance that is published 
in the Internal Revenue Bulletin. Notice 2007-81, 2007-2 CB 899, 
describes the methodology used by the Department of the Treasury 
(Treasury Department) to develop the corporate bond yield curve. 
Section 1.430(h)(2)-1(d) also provides that the yield curve for each 
month will be set forth in guidance published in the Internal Revenue 
Bulletin. Monthly IRS notices set forth the corporate bond yield curve 
for the month (without regard to the 24-month averaging specification), 
the section 430 segment interest rates (before and after adjustment 
pursuant to section 430(h)(3)(C)(iv)), and the 25-year average segment 
rates (which are updated annually).
    Section 417(e)(3) provides assumptions for determining minimum 
present value for certain purposes, including the determination of a 
lump-sum that is the present value of an annuity, and prescribes an 
applicable interest rate for this purpose. Section 417(e)(3)(C) 
provides that the term ``applicable interest rate'' means the adjusted 
first, second, and third segment rates applied under rules similar to 
the rules of section 430(h)(2)(C) for the month before the date of a 
distribution or such other time as the Secretary may prescribe by 
regulations. However, for purposes of section 417(e)(3), these rates 
are determined without regard to the segment rate stabilization rules 
of section 430(h)(2)(C)(iv). In addition, under section 417(e)(3)(D), 
these rates are determined using the average yields for a month, rather 
than the 24-month average used under section 430(h)(2)(D).

[[Page 2129]]

    Under section 846(c), the Secretary determines the applicable 
interest rate to be used by insurance companies to discount unpaid 
losses on the basis of the corporate bond yield curve (as defined in 
section 430(h)(2)(D)(i), determined by substituting ``60-month period'' 
for ``24-month period''). Under Sec.  1.832-4(c), the applicable 
interest rate determined under section 846(c) is also used by insurance 
companies to discount estimated salvage recoverable, unless the 
Commissioner publishes applicable discount factors to be used for that 
purpose.
    A notice of proposed rulemaking and notice of public hearing (REG-
124123-22) that would revise the methodology for determining the 
corporate bond yield curve was published in the Federal Register (88 FR 
41047) on June 23, 2023. Two commenters submitted comments on the 
proposed regulations. A public hearing on the proposed regulations was 
scheduled for August 30, 2023, but was cancelled because no one 
requested to speak. After consideration of these comments, these final 
regulations are adopted with minor changes to the language from the 
proposed regulations to provide more detail on the methodology for 
determining the corporate bond yield curve.

Summary of Comments and Explanation of Revisions

    These regulations specify the methodology used to develop the 
corporate bond yield curve. This methodology is generally the same as 
the methodology set forth in Notice 2007-81 but includes two 
refinements to take into account changes in the bond market since 2007. 
The regulations also amend the existing regulations under section 
430(h)(2) to reflect the addition of the interest rate stabilization 
rules of section 430(h)(2)(C)(iv) and to eliminate transition rules 
that applied to plan years beginning before January 1, 2010.
    One commenter expressed support for the rules set forth in the 
proposed regulations. The other commenter raised various concerns 
regarding the corporate bond yield curve.\2\ Those concerns are 
discussed in this Summary of Comments and Explanation of Revisions.
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    \2\ This commenter suggested that multiple yield curves be 
published for different segments of the corporate bond market, such 
as by industry, sector, or region. This suggestion is inconsistent 
with the requirements of section 430(h)(2)(D) and (F), under which 
the Secretary must publish a single corporate bond yield curve for 
each month. In addition, this commenter expressed concern about the 
impact of the proposed regulations on the determination of the 
applicable federal rate and any resulting impact on the tax-exempt 
bond market. However, pursuant to section 1274(d), the applicable 
federal rates are determined with reference to the yields on 
Treasury securities, not corporate bonds; thus, these regulations 
have no effect on the determination of the applicable federal rates.
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    Under these regulations, as under Notice 2007-81, the monthly 
corporate bond yield curve for a month is defined as the set of spot 
rates at specified durations. The specified durations are at 6-month 
intervals ranging from 6 months through 100 years, and the spot rate at 
a duration is the yield (when compounded semiannually) for a bond that 
matures at that duration with a single payment at maturity. Each spot 
rate at a specified duration on the monthly corporate bond yield curve 
for a month is equal to the arithmetic average for each business day of 
that month of the spot rates at that duration on the daily corporate 
bond yield curves.
    Under these regulations, as under Notice 2007-81, each spot rate on 
the daily corporate bond yield curve is derived from a forward interest 
rate function (that is, the projected instantaneous interest rate at 
each point in time) that is defined by the selection of five 
coefficients of B-splines determined using the bond data, taking into 
account certain adjustment factors.
    Two of those adjustment factors, which are included in the 
methodology set forth in Notice 2007-81, take into account the ratings 
of the bonds used to develop the daily corporate bond yield curve. The 
third adjustment factor, which was not included in the methodology set 
forth in that notice, is a hump adjustment variable that peaks at 20 
years maturity \3\ and serves to capture the effects of the hump in 
spot rates that is often seen around 20 years maturity.
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    \3\ The hump adjustment variable is a mathematical function that 
is a cubic spline in the interval from 10 years maturity through 30 
years maturity made up of two polynomials with a smooth junction at 
20 years maturity.
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    Under the methodology used in Notice 2007-81, the spot rate at a 
duration t could be calculated directly as the discount rate at that 
duration derived from the forward interest rate function. However, the 
addition of the hump adjustment variable under the proposed regulations 
means that the calculation of the spot rates from the discount function 
and the hump adjustment variable requires an intermediate step. This 
intermediate step, which was implicit in the proposed regulations, 
involves the determination of a par yield curve (that is, the curve in 
which the rate at maturity t on the curve is equal to the yield for a 
bond with maturity of t for which the price is the same as the 
principal amount) that is calculated from the discount function and the 
hump adjustment variable. In response to a commenter's request that the 
regulations specify clear standards for the determination of the 
corporate bond yield curve, these regulations describe this 
intermediate step. Accordingly, these regulations clarify that the spot 
rates are determined by first setting the spot rate at duration of \1/
2\ year on the daily corporate bond yield curve as the yield at 
maturity of \1/2\ year from the daily par yield curve, and then 
determining the spot rate for any later duration by applying an 
iterative process based on the spot rates at earlier durations and the 
daily par yield curve.
    One commenter asked how the IRS handles the situation in which the 
rating of a bond is upgraded or downgraded during a month, or a bond is 
rated differently by different rating organizations for a single day. 
Because the monthly corporate bond yield curve is developed from a set 
of daily corporate bond yield curves, changes in ratings during the 
month are automatically taken into account. In the case of a bond that 
is rated differently by different ratings organizations on a single 
day, the bond is treated as having the average of the ratings for that 
day.
    These regulations generally adopt the specification for the bond 
data set for a month under Notice 2007-81 but modify an exclusion from 
that bond data set. Under Notice 2007-81 and these regulations, subject 
to certain exclusions, the bonds that are used to construct the daily 
corporate bond yield curve for a business day are bonds with the 
following characteristics: (1) maturities longer than \1/2\ year,\4\ 
(2) at least two payment dates, (3) designated as corporate, (4) high 
quality ratings (that is, AAA, AA, or A) as of that business day from 
the nationally recognized statistical rating organizations,\5\ (5) at 
least $250 million in par amount outstanding on at least one day during 
the month, (6) payment of fixed nominal semiannual coupons and the 
principal amount at maturity,

[[Page 2130]]

and (7) maturity not later than 30 years after that day.
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    \4\ Under Notice 2007-81 and the regulations, the data for 
durations equal to or below \1/2\ year that is used to construct the 
daily corporate bond yield curve consists of AA financial and AA 
nonfinancial commercial paper rates, as reported by the Federal 
Reserve Board.
    \5\ Although section 939A(b) of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 
1376, generally prohibits federal agencies from issuing regulations 
that apply a standard that is based on credit ratings from 
statistical rating organizations, this prohibition does not apply to 
the construction of the daily corporate bond yield curve because the 
use of those credit ratings is required by section 430(h)(2)(D) of 
the Code.
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    Under Notice 2007-81 and these regulations, the following 
categories of bonds are excluded from the bond data set: (1) bonds not 
denominated in U.S. dollars, (2) bonds not issued by U.S. corporations, 
(3) bonds that are capital securities (sometimes referred to as hybrid 
preferred stock), (4) bonds having variable coupon rates, (5) 
convertible bonds, (6) bonds issued by a government-sponsored 
enterprise (such as the Federal National Mortgage Association), (7) 
asset-backed bonds, (8) putable bonds, (9) bonds with sinking funds, 
and (10) bonds with a par amount outstanding below $250 million for the 
day for which the daily yield curve is constructed.
    Notice 2007-81 also excluded callable bonds (unless the call 
feature is make-whole) from the bond data set used to construct the 
daily corporate bond yield curve. The regulations generally retain this 
exclusion but narrow it. Under the proposed regulations, this exclusion 
does not apply if the call feature is exercisable only during the last 
year before maturity. This type of call feature has recently become 
more widely used, and the inclusion of bonds with this feature in the 
data set will result in a significantly larger pool of bonds that more 
accurately reflects the market for high quality corporate bonds.
    One commenter asked how the calculation of the yield of a corporate 
bond is affected by any options embedded in that bond. The complexity 
of the calculations involved in quantifying this effect is the reason 
that corporate bonds with embedded put and call options have been 
generally excluded from the set of bonds used to determine the 
corporate bond yield curve in the past. However, as noted in the 
preceding paragraph, including bonds with a call feature that is 
exercisable only during the last year before maturity significantly 
increases the pool of bonds that are taken into account in developing 
the corporate bond yield curve, and the Treasury Department and the IRS 
have determined that this feature does not significantly affect the 
yields of these bonds. Accordingly, no adjustment will be made to 
reflect the effect of this feature on bond yields.

Applicability Date

    These regulations apply for purposes of determining the corporate 
bond yield curve under section 430(h)(2)(D) for months that begin on or 
after February 1, 2024.

Statement of Availability of IRS Documents

    IRS Revenue Rulings, Revenue Procedures, and Notices cited in this 
document are published in the Internal Revenue Bulletin (or Cumulative 
Bulletin) and are available from the Superintendent of Documents, U.S. 
Government Printing Office, Washington, DC 20402, or by visiting the 
IRS website at www.irs.gov.

Special Analyses

Regulatory Planning and Review (Executive Orders 12866 and 13563)

    Pursuant to the Memorandum of Agreement, Review of Treasury 
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory 
actions issued by the IRS are not subject to the requirements of 
section 6 of Executive Order 12866, as amended. Therefore, a regulatory 
impact assessment is not required.

Regulatory Flexibility Act

    It is hereby certified that this rule will not have a significant 
economic impact on a substantial number of small entities. The vast 
majority of plan sponsors of defined benefit plans that are subject to 
section 430 choose to use the segment rates under section 430(h)(2)(C), 
rather than the corporate bond yield curve under section 430(h)(2)(D), 
to determine minimum required contributions. Furthermore, most of the 
plan sponsors who choose to use the corporate bond yield curve for this 
purpose are not small employers. Therefore, the methodology set forth 
in these regulations for constructing the corporate bond yield curve 
will not have a significant effect on minimum required contributions 
for small employers. In addition, the insurance companies that are 
required to use a modified version of the corporate bond yield curve to 
discount unpaid losses are typically not small employers. Accordingly, 
a regulatory flexibility analysis under the Regulatory Flexibility Act 
is not required.
    Pursuant to section 7805(f) of the Code, the proposed regulations 
that preceded these regulations were submitted to the Chief Counsel for 
Advocacy of the Small Business Administration for comment on their 
impact on small business, and no comments were received.

Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 requires 
that agencies assess anticipated costs and benefits and take certain 
other actions before issuing a final rule that includes any Federal 
mandate that may result in expenditures in any one year by a State, 
local, or Tribal government, in the aggregate, or by the private 
sector, of $100 million in 1995 dollars, updated annually for 
inflation. These regulations do not include any Federal mandate that 
may result in expenditures by State, local, or Tribal governments, or 
by the private sector in excess of that threshold.

Executive Order 13132: Federalism

    Executive Order 13132 (Federalism) prohibits an agency from 
publishing any rule that has federalism implications if the rule either 
imposes substantial, direct compliance costs on State and local 
governments, and is not required by statute, or preempts State law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the Executive order. These regulations do not have 
federalism implications, impose substantial direct compliance costs on 
State and local governments, or preempt State law within the meaning of 
the Executive order.

Congressional Review Act

    Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.), 
the Office of Information and Regulatory Affairs designated this rule 
as not a major rule, as defined by 5 U.S.C. 804(2).

Drafting Information

    The principal authors of these regulations are Arslan Malik and 
Linda S.F. Marshall of the Office of Associate Chief Counsel (Employee 
Benefits, Exempt Organizations, and Employment Taxes). However, other 
personnel from the Treasury Department and the IRS participated in the 
development of these regulations.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, the Treasury Department and the IRS amend 26 CFR part 
1 as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *


0
Par. 2. Section 1.430(h)(2)-1 is amended by:
0
1. Removing the phrase ``and transition rules'' in the last sentence of 
paragraph (a)(1);
0
2. Revising paragraph (b)(2);

[[Page 2131]]

0
3. Removing the last sentence in paragraph (c)(1);
0
4. In paragraphs (c)(2)(i) through (iii), removing the phrase ``under 
the transition rule of paragraph (h)(4) of this section'' and adding 
the phrase ``under the interest rate stabilization rules in section 
430(h)(2)(C)(iv)'' in its place;
0
5. Revising paragraph (d);
0
6. Removing paragraph (e)(3) and redesignating paragraph (e)(4) as 
paragraph (e)(3);
0
7. In newly redesignated paragraph (e)(3)(ii), removing the phrase 
``this paragraph (e)(4)'' and adding the phrase ``this paragraph 
(e)(3)'' in its place;
0
8. Redesignating paragraph (e)(5) as paragraph (e)(4); and
0
9. Revising paragraph (h).
    The revisions read as follows:


Sec.  1.430(h)(2)-1   Interest rates used to determine present value.

* * * * *
    (b) * * *
    (2) Benefits payable within 5 years. In the case of benefits 
expected to be payable during the 5-year period beginning on the 
valuation date for the plan year, the interest rate used in determining 
the present value of the benefits that are included in the target 
normal cost and the funding target for the plan is the first segment 
rate with respect to the applicable month, as described in paragraph 
(c)(2)(i) of this section.
* * * * *
    (d) Monthly corporate bond yield curve--(1) In general--(i) 
Construction of monthly corporate bond yield curve. For purposes of 
this section, the monthly corporate bond yield curve for a month is 
defined as the set of spot rates at specified durations. The specified 
durations are at 6-month intervals ranging from 6 months through 100 
years and the spot rate at a duration is the yield (when compounded 
semiannually) for a bond that matures at that duration with a single 
payment at maturity. The monthly corporate bond yield curve is 
constructed as the average of the spot rates from the set of daily 
corporate bond yield curves as specified in paragraph (d)(1)(ii) of 
this section. Each daily corporate bond yield curve is constructed 
using the methodology set forth in paragraph (d)(2) of this section 
based on the data described in paragraph (d)(3) of this section. The 
yield curve for each month will be published in the Internal Revenue 
Bulletin. See Sec.  601.601(d) of this chapter.
    (ii) Monthly corporate bond yield curve constructed through 
averaging. Each spot rate at a specified duration on the monthly 
corporate bond yield curve for a month is equal to the arithmetic 
average, for each business day of that month, of the spot rates at that 
duration on the daily corporate bond yield curves.
    (2) Construction of the daily corporate bond yield curve--(i) In 
general--(A) Calculation of spot rates. The spot rate at duration of 
\1/2\ year on the daily corporate bond yield curve is set equal to the 
yield at maturity of \1/2\ year from the daily par yield curve 
described in paragraph (d)(2)(i)(B) of this section. The spot rate for 
any later duration on the daily corporate bond yield curve is 
determined by applying an iterative process based on the spot rates at 
earlier durations and the daily par yield curve.
    (B) Calculation of par yield curve. The daily par yield curve (that 
is, the curve in which the rate at maturity t on the curve is equal to 
the yield for a bond with maturity of t for which the price is the same 
as the principal amount) is calculated from the discount function 
described in paragraph (d)(2)(i)(C) of this section and the hump 
adjustment variable described in paragraph (d)(2)(iii)(D) of this 
section.
    (C) Derivation of discount function. The discount function for a 
day at duration t (denoted d(t)) is derived from the forward interest 
rate function as described in paragraph (d)(2)(ii) of this section 
(denoted f(z)) using the following equation:
[GRAPHIC] [TIFF OMITTED] TR12JA24.072

    (ii) Determination of forward interest rates--(A) In general. The 
forward interest rate function used to derive the discount function is 
determined as a series of cubic polynomials (referred to as a cubic 
spline) that have a smooth junction at specified knot points 
(maturities of 0, 1.5, 3, 7, 15, and 30 years). The requirement that 
the polynomials have a smooth junction at a knot point is satisfied if 
the two polynomials that are meeting at the knot have the same value, 
the same derivative, and the same second derivative at that knot point.
    (B) Constraints on the forward interest function. The following 
three constraints are placed on the forward interest rate function--
    (1) The second derivative of the function is set to 0 at maturity 
0.
    (2) The value of the forward interest rate function at and after 30 
years is constrained to equal its average value from 15 to 30 years.
    (3) The derivative of the forward interest rate function is set to 
0 at maturity 30 years.
    (iii) Parameters for daily bond price model--(A) B-spline 
coefficients. The assumed cubic spline for the forward interest rate 
function can be described as a linear combination of B-splines, with 
five parameters, which are determined taking into account the two 
coefficients for the bond-quality adjustment variables described in 
paragraphs (d)(2)(iii)(B) and (C) of this section and the coefficient 
for the hump adjustment variable described in paragraph (d)(2)(iii)(D) 
of this section. The five parameters and three coefficients are 
determined using the bond data weighted as described in paragraph 
(d)(2)(iv) of this section. After this weighting of the bond data, the 
five parameters and three coefficients are chosen to minimize the sum 
of the squared differences between the bid price for each of the bonds 
(or ask price for commercial paper) and the price estimated for each of 
those bonds determined using the specified parameters and coefficients, 
and taking into account the bond's coupon rate, number of years until 
maturity, and rating.
    (B) Adjustment factor for share of bonds that are AA-rated. The 
first adjustment variable is based on the proportion of bonds that are 
rated AA within the universe of bonds in the data set that are rated AA 
or AAA, weighted by par value. In the case of an AAA-rated bond the 
adjustment variable described in this paragraph (d)(2)(iii)(B) is equal 
to the product of the proportion described in the preceding sentence 
and the number of years until maturity for the bond. In the case of an 
AA-rated bond the adjustment variable described in this paragraph 
(d)(2)(iii)(B) is equal to the product of (1- that proportion) and the 
number of years until maturity for the bond. In the case of an A-rated 
bond, the adjustment variable described in this paragraph 
(d)(2)(iii)(B) is 0.
    (C) Adjustment factor for share of bonds that are A-rated. The 
second adjustment variable is based on the proportion of bonds rated A 
within the universe of bonds in the data set, weighted by par value. In 
the case of an AAA-rated bond or an AA-rated bond, the adjustment 
variable described in this paragraph (d)(2)(iii)(C) is equal to the 
product of the proportion described in the preceding sentence and the 
number of years until maturity for the bond. In the case of an A-rated 
bond, the adjustment variable described in this paragraph 
(d)(2)(iii)(C) is equal to the product of (1- that proportion) and the 
number of years until maturity for the bond.
    (D) Hump adjustment variable. The hump adjustment variable is a

[[Page 2132]]

mathematical function that is a cubic spline in the interval from 10 
years maturity through 30 years maturity made up of two polynomials 
with a smooth junction (as described in paragraph (d)(2)(ii)(A) of this 
section) at 20 years maturity. The spline rises from 0 at 10 years 
maturity to 1.0 at 20 years maturity, then falls back down to 0 at 30 
years maturity. The hump adjustment variable is 0 for maturities less 
than 10 years and maturities greater than 30 years.
    (iv) Weighting of bond data. The bond data are weighted in three 
steps. In the first step, equal weights are assigned to the commercial 
paper rates at the short end of the curve, and the par amounts 
outstanding of all the bonds are rescaled so that their sum equals the 
sum of the weights for commercial paper. In the second step, the 
squared price difference for each commercial paper rate is multiplied 
by the commercial paper weight, and the squared price difference for 
each bond is multiplied by the bond's rescaled par amount outstanding. 
In the third step, applicable for bonds with duration greater than 1, 
the weighted squared price difference for each bond from the second 
step is divided by the bond's duration.
    (3) Data used--(i) In general. Except as otherwise provided in this 
paragraph (d)(3), the bonds that are used to construct the daily 
corporate bond yield curve for a business day are bonds with maturities 
longer than \1/2\ year, with at least two payment dates, and that:
    (A) Are designated as corporate;
    (B) Have high quality ratings (AAA, AA, or A) as of that business 
day from the nationally recognized statistical rating organizations;
    (C) Have at least $250 million in par amount outstanding on at 
least one day during the month;
    (D) Pay fixed nominal semiannual coupons and the principal amount 
at maturity; and
    (E) Mature not later than 30 years after that business day.
    (ii) Excluded bonds. The following types of bonds are not used to 
construct the daily corporate bond yield curve for a date:
    (A) Bonds not denominated in U.S. dollars;
    (B) Bonds not issued by U.S. corporations;
    (C) Bonds that are capital securities (sometimes referred to as 
hybrid preferred stock);
    (D) Bonds with variable coupon rates;
    (E) Convertible bonds;
    (F) Bonds issued by a government-sponsored enterprise (such as the 
Federal National Mortgage Association);
    (G) Asset-backed bonds;
    (H) Callable bonds, unless the call feature is make-whole or the 
call feature is exercisable only during the last year before maturity;
    (I) Putable bonds;
    (J) Bonds with sinking funds; and
    (K) Bonds with an outstanding par amount below $250 million for the 
day for which the daily yield curve is constructed.
    (iii) Durations equal to or below \1/2\ year. The data for 
durations equal to or below \1/2\ year that is used to construct the 
daily corporate bond yield curve consists of AA financial and AA 
nonfinancial commercial paper rates, as reported by the Federal Reserve 
Board.
* * * * *
    (h) Applicability date. This section applies for months that begin 
on or after February 1, 2024. For rules that apply for earlier periods, 
see 26 CFR 1.430(h)(2)-1 revised as of April 1, 2023.

Douglas W. O'Donnell,
Deputy Commissioner for Services and Enforcement.
    Approved: December 27, 2023.
Lily Batchelder,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2024-00552 Filed 1-11-24; 8:45 am]
BILLING CODE 4830-01-P