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FEDERAL RESERVE BANK OF DALLAS
FISCAL. A G E N T O F TH E U N ITE D ST A T E S

Dallas, Texas, December 30, 1964

PRELIMINARY ANNOUNCEMENT
ADVANCE REFUNDING OFFER

To All Banking institutions and Others Concerned
in the Eleventh Federal Reserve District:

There is quoted below a press statement issued today by the Treasury Department in regard to an
advance refunding:
The Treasury today announced that it is offering holders of the 2 s s % bond due February 15,
/
1965, and seven other selected note and bond issues maturing from November 1965 to November
1967 an opportunity to extend the maturity of their holdings at attractive yields.
The Treasury also said that it will shortly be offering $1.5 to $2.0 billion of June tax anticipa­
tion bills.
The securities eligible for exchange and those being offered in the advance refunding are as
follows:
Securities Eligible for Exchange
and Their Maturity Dates

2% %
31/ 2 %
4%
3% %
3% %
3% %
3 3/4%
3 ss %
/

bonds
notes
notes
notes
notes
bonds
notes
bonds

2 /1 5 / 6 5
1 1 /1 5 /6 5
1 1 /1 5 /6 5
2 /1 5 / 6 6
2 /1 5 / 6 6
5 /1 5 / 6 6
8 /1 5 / 6 7
1 1 /1 5 /6 7

Securities Offered in Exchange
and Their Maturity Dates

*
4%
►

bonds 2 /1 5 / 7 0

4Vs% bonds 2 /1 5 / 7 4
4 V 4 % bonds 8 /1 5 /8 7 - 9 2
(reopened issue)

*

T h e public holds $3.4 billion of the 2 % % bonds of February 15, 1965, and about $550 million
is held by official accounts. This issue is so near to final maturity that its holders are not being offered
the nontaxable exchange privilege that is, as has been customary, being made available to the other
seven issues eligible for this advance exchange.
T he seven eligible issues maturing from November 1965 to November 1967 involve $18.7 billion
of public holdings and official accounts hold an additional amount of about $10.4 billion of these
maturities. N o gain or loss shall be recognized for Federal income tax purposes solely on account of
the exchange of these issues. A fuller statement of the treatment of the exchange for tax purposes is
given in an attachment hereto.
The AVs% bonds of 1974 and the 4
bonds of 1987-92 contain the usual provision for
redemption at par value prior to maturity in payment of Federal estate taxes.
Exchange subscription books will be open for five days, January 4-8. T h e exchanges will be made
on the basis of par for par with accrued interest adjustments as of January 15, 1965. Because of dif­
ferences in coupon and maturity among the various eligible issues, cash adjustments will be made to
provide all subscribers with appropriately attractive opportunities. The cash and interest adjustments
are shown in Table 1 attached.

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

The payment and delivery date for the new securities is January 19, 1965. All unmatured coupons
should be attached to bearer securities presented for exchange. If a net amount is payable to the sub­
scriber (see T a b le l) it will be made following the acceptance of surrendered bearer securities or the
discharge of registration of registered securities. If a net amount is payable by the subscriber it
should accompany the subscription.
A holder of the outstanding eligible securities can compare the interest he will receive as a result
of exchanging now (plus or minus any payment, other than the adjustment of accrued interest) with
the interest he is currently receiving on the eligible issues plus what he might expect to obtain by
reinvesting the proceeds of the eligible securities at maturity. The approximate investment yield to
the holder who makes the exchange is shown in column 2 of the attached Table 2. The minimum rate
of reinvestment return that a holder who does not make the exchange would instead have to earn for
the extension period, in order to equal the investment yield that would be received by making the
exchange, is shown in the columns of Table 2 headed “Approximate reinvestment rate for the extension
period.” For example, if the 3 % % notes of 8 /1 5 / 6 7 are exchanged for the 4 Vs % bonds of 2 /1 5 /7 4 ,
the investor receives 4V&% for the entire 9 years and 1 month plus $0.10 (per $100 face value)
immediately. If the exchange is not made, a 3 % % rate will be received until August 15, 1967, requir­
ing the reinvestment of the proceeds of the 3 % ’s of August 1967 at that time at a rate of at least
4 .3 2 % for the remaining 6 years and 6 months, all at compound interest to average out to a 4 V s %
rate for 9 years and 1 month plus the $0.10 immediate payment.
T he official circulars, subscription forms, and other material containing additional details of the offering
will be mailed Thursday, December 31.

Yours very truly,
Watrous H . Irons
President

STATEMENT CONCERNING RECOGNITION OF GAIN OR
LOSS FOR FEDERAL INCOME TAX PURPOSES
JANUARY 1965 ADVANCE REFUNDING

Gain or loss, if any, upon exchanges of the 2% percent bonds of 1965, must be fully recognized
under the Internal Revenue Code.
Pursuant to the authority of Section 1037(A) of the Internal Revenue Code no gain or loss shall
be recognized for Federal income tax purposes solely on account of the exchange of the remaining
seven issues eligible for exchange in this advance refunding; provided, however, that Section 1031(B)
of the Code requires recognition of any gain realized on such exchanges to the extent that money
(other than interest) is received by the security holder in connection with the exchange as indicated
in the following paragraph.
If a cash payment on account of the issue price of the new securities is paid to the investor, and
such amount (discount) plus the fair market value1 of the new securities exceeds the cost basis to the
investor of the securities exchanged, such gain (but not to exceed the amount of the payment) must
be recognized and accounted for as gain for the taxable year of exchange. The investor will carry the
new securities on his books at the same amount as he is now carrying the old securities except that
he will reduce the cost basis by the amount of the payment and increase it by the amount of the gain
recognized. If the fair market value of the new securities plus the amount of the payment does not
exceed the cost basis of the old securities, the basis of the new securities will be the cost basis of the
old securities reduced by the amount of the payment. Gain to the extent not recognized in accordance
with the above (or loss), if any, upon the old securities surrendered in exchange will be taken into
account upon the disposition or redemption of the new securities. (See examples following the next
paragraph.)
If a premium is paid by the subscriber no gain or loss will be recognized; but his tax basis in the
new securities will be his cost basis of the old securities increased by the amount of the premium.
Examples of Federal Income Tax treatment where a bond is offered by the Treasury
with a payment (other than the accrued interest adjustment) to the investor
1. Assume that:
(a) The fair market value of the security offered by the Treasury on the date the subscription
is submitted is $99.50 (per $100 face value).
(b) The payment to the subscriber (discount) on account o f $100 issue price is $.80.
(c) The amortised cost basis of the security surrendered on the books of the subscriber is
$100.50 (per $100 face value). (It is assumed that the security surrendered was bought
at a price above $100.50 and that the original premium was reduced prorata over the period
from purchase date to maturity.)
The sum of the fair market value of the security offered by the Treasury and the payment
to the subscriber is $99.50 plus $.80 or $100.30. This is less than the cost basis of the issue sur­
rendered, therefore, no gain is recognized. The new issue will be entered on the books of the sub­
scriber at a cost basis of $99.70, the cost basis of the issue surrendered less $.80. The gain or
loss between this cost basis and the proceeds of a subsequent sale or redemption of the new
issue will be a capital gain or loss to all investors, except those to whom the securities are stock
in trade. Under present law, if the combined time that the security surrendered and the new
security received in exchange were held exceeds 6 months, the capital gain or loss is long-term,
otherwise it is short-term.
1 The mean of the bid and asked quotations on date subscriptions are submitted.

2. The assumptions are the same as in example 1 except that the payment (discount) to the sub­
scriber is now $1.20 (per $100 face value) instead of $.80 in example 1.
The sum o f the fair market value of the new security received in exchange by the subscriber
plus the $1.20 payment (discount) is $100.70. This exceeds the cost basis of the security sur­
rendered by $.20. This excess is a recognized gain reportable for the year in which the exchange
takes place. The gain is a capital gain except to those to whom the securities are stock in trade.
Under present law, if the time the security surrendered was held exceeds 6 months, the capital
gain is long-term, otherwise it is short-term.
The subscriber will carry the new issue received in exchange at a cost basis equal to the basis
of the issue surrendered ($100.50), less the payment ($1.20), plus the amount of the recognized
gain ($.20), or ($100.50 minus $1.20 plus $.20) $99.50.
3. The assumptions are the same as in example 1, except that the cost basis on the books of the
subscriber, of the security surrendered is $99.00 (per $100 face value) instead of $100.50 in
example 1.
The sum of the fair market value of the new issue received in exchange by the subscriber
plus the $.80 payment (discount) is $100.30 (as in example 1). This exceeds the $99.00 cost basis
by more than $.80. However, the amount of the gain reportable for the year of the exchange is
$.80, since the amount of gain recognized cannot exceed the amount of the payment. The nature
of the recognized gain and its treatment is the same as in example 2.
In this case, the subscriber will enter the new security received in exchange on his books at
$99.00, the same cost basis as the security surrendered.

TABLE No. 1

PAYMENTS TO AND BY THE SUBSCRIBER IN THE JANUARY 1965 ADVANCE REFUNDING
(In Dollars Per $100 Face Value)
Amounts To Be Paid To Or By Subscribers
Accrued Interest
Price Adjustment
To January 15, 1965
Payment1
To Be Paid
To
By
To
By
Subscriber
Subscriber
2
3
Subscriber
Subscriber

Securities To Be Exchanged

2% % Bond, 2 /15/654
.600000
Nov. 1965-Nov. 1967 Maturities:
3V2 % Note, 11/15/65
.450000
4%
Note, 11/15/65
.900000
3% % Note, 2/15/66
.400000
3% % Note, 2/15/66
.700000
3% % Bond, 5/15/66
.500000
3% % Note, 8/15/67
.050000
3% % Bond, 11/15/67
—
2% % Bond, 2/15/654
Nov. 1965-Nov. 1967 Maturities:
3V 2% Note, 11/15/65
4%
Note, 11/15/65
3 % % Note, 2/15/66
3% '/ > Note, 2/15/66
<
3% % Bond, 5/15/66
3% % Note, 8/15/67
3 % % Bond, 11/15/67

.650000
.500000
.950000
.450000
.750000
.550000
.100000
—

—
2% % Bond, 2/15/654
Nov. 1965-Nov. 1967 Maturities:
—
3y2% Note, 11/15/65
4%
Note, 11/15/65
.050000
—
3% % Note, 2 1 1 5 1 m
—
3% % Note, 2 1 15/66
—
3 % % Bond, 5/15/66
—
3% % Note, 8/15/67
3% % Bond, 11/15/67
—

For the 4% Bond 2/15/70
—
1.091372
.589779
.674033
____
1.507133
____
1.611073
____
.631906
____
1.559103
.300000
.610843
For the 4 % % Bond 2/15/74
—
1.091372

1.691372

—

—

—

1.039779
1.574033
1.907133
2.311073
1.131906
1.609103
.310843

____

1.741372

—

—

____

_

____

____

.589779
.674033
____
1.507133
____
1.611073
____
.631906
____
1.559103
.610843
.250000
For the 4 *4% Bond 8/15/87-92
.250000
1.091372
____

_

.400000

.589779
.674033
1.507133
1.611073
.631906
1.559103
.610843

—

.450000
.150000
.350000
.800000
1.150000

Net Amount To Be Paid
By
To
Subscriber
Subscriber

____
____
____
____

_
_
____
____

____
—

1.089779
1.624033
1.957133
2.361073
1.181906
1.659103
.360843

1.766984

—

1.766984
1.766984
1.766984
1.766984
1.766984
1.766984
1.766984

____

—
-----—

—

____
—
—
—
—
____
—

.925612
1.577205
1.042951
.709851
.305911
1.485078
1.007881
2.306141

____
—
____
—
—

—

OFFICE OF THE SECRETARY OF THE TREASURY
OFFICE OF DEBT ANALYSIS
1 Payment on account of purchase price of offered securities.
2 On securities exchanged.
3 On securities offered.
4 Not eligible for nontaxable exchange privilege.

—
—

December 30, 1964

TABLE No. 2
IN V E S T M E N T R E T U R N S I N T H E J A N U A R Y 1965 A D V A N C E R E F U N D IN G

Securities Eligible
for Exchange

Approximate Investment Yield
From 1/15/65 to Maturity1
4*4% Bond
8/15/87-923
4% Bond
4*4% Bond To First Call
2/15/70
2/15/74
or Maturity

2% % Bond, 2/15/654
4.16%
Nov. 1965-Nov. 1967 Maturities:
3V2 % Note, 11/15/65
4.18
4%
Note, 11/15/65
4.18
3% % Note, 2/15/66
4.18
3 % % Note, 2 1 15/66
4.18
3% % Bond. 5/15/66
4.18
3% % Note, 8/15/67
4.18
3% % Bond, 11/15/67
4.17

Approximate Reinvestment Rate
for the Extension Period2
4!4% Bond
8/15/87-923
4% Bond
4*4% Bond
To
To
2/15/70
2/15/74
First Call
Maturity

4.23%

4.24%

4.16%

4.23%

4.24%

4.24%

4.24
4.24
4.24
4.24
4.24
4.24
4.24

4.25
4.25
4.25
4.25
4.25
4.25
4.25

4.23
4.24
4.23
4.24
4.25
4.31
4.37

4.28
4.28
4.28
4.28
4.29
4.32
4.35

4.27
4.27
4.27
4.27
4.27
4.28
4.29

4.26
4.27
4.26
4.27
4.27
4.28
4.29

OFFICE OF THE SECRETARY OF THE TREASURY
December 30, 1964
OFFICE OF DEBT ANALYSIS
1 Yields to nontaxable holders (or before tax) on issues offered in exchange based on prices of eligible issues (adjusted for
payments on account of issue price). Prices are the mean of bid and ask quotations at noon on December 29, 1964.
2 Rate for nontaxable holder (or before tax).
3 Reopening of an existing security.
4 Not eligible for nontaxable exchange privilege.


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102