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January 18 s 1985
To the Addressee:
Enclosed is a copy of a statement issued on January 15, 1985 by
the Treasury Department announcing a new program to facilitate Separate
Trading of Registered Interest and Principal of Securities (STRIPS) and
enclosing explanatory material.
Questions on the STRIPS program should be directed to H. John
Costalos, Manager, Securities Transfer Department (Tel. No. 212-791-5986).
Additional copies of the enclosure are available upon request directed to the
Circulars Division.
FEDERAL RESERVE BANK OF NEW YORK
Fiscal Agent of the the United States
* •MPKDDUQED AT THE FEDERAL E S E M
BANK OF NEW YORK
TREASURY NEWS
D e p a rtm e n t o f th e T reasury • W a sh in gto n , D.C. • Telephone 166-20/
Contaet8
©rien Henson
C202) 566 = 2041
Treasury Announces New STRIPS Program
iecretary ©£ the Treaiury Donald T. Regan announced today a
new-program to facilitate jgtparat® Trading ©f Registered Interest
and Principal ©£ Securitlei {STRIPST. Treasury8o plan te“ set up
thifl"~facillty wai^announced ©n August 16,
Secretary Began stated that th© STRIPS program exemplifies
the basic public debt management and free market philosophy of
this Administration*
It reduces the cost to the government of
financing th© public debt by facilitating competitive private
market initiatives with a minimum of direct government involvement*
The STRIPS Program, Under the new STRIPS program, ©elected
Treasury securities may be maintained in the book-entry system
©porated by th© Federal R@®@rv© Hank© in © manner that permit©
©tparatt trading and ownership of th© intertsi and principal pay
ments. This will make it possible for th© first time for the
market to trad© m p arat© principal and interest components, or gero
coupon instruments, in book-entry form, as direct ©bligation® of
th© UoSo
Currently, each Treasury marketable neeurity has a unique
CUSIP number that identifies the security for maintenance and
transfer purpooeso Under th® STRIPS program, to facilitate iden
tification of the component parts, sach principal and interest com
ponent will b© assigned a separate CUSIP number. For example, a
Treasury 10-year note eligible in STRIPS form could be held either
a© th© fully constituted not© under its own CUSIP number ®r as 21
separate payments, with 21 separate CUSIP numbers identifying each
of 20 semiannual interest components and the principal component.
Timing. Th© first oeeuritie© to b@ made eligible for STRIPS
will is the 10-year note and 30-year bond to be Issued as part of
th© quarterly refunding on February !l0 Details of these two
(DQguritiQS will b® announced ©n January 30. Shortly thereafter
th© Troaoury plan© to make STRIPS available for th© 10- and
39°yoar securities issued November 15, 1114. Th® 20-y®ar bond of
Novambar 15, 2004 will b®eom© eligible for STRIPS soon after th®
first interest payment dat© on IMay 15, 1985. As experience with
the program develops and system enhancements are completed to
accommodate a larger volume of requests, ©th©r long-term Treasury
©securities will be available for STRIPS.
_
R-2386
C a l l Feature,,
Th® 3 0 - y o a r bond to bo i s s u e d i n th® F e b r u a r y 1115
r e f u n d i n g w i l l n o t h a v e a c a l l f © a t u r ® 0 P r e v i o u s 3 0 - y e a r bond i s s u e s
hav© b©©n c a l l a b l e by th© T r e a s u r y a f t e r 25 y e a r s ? t h o r e f o r © * s e p a r a t L
t r a d i n g o f th© c a l l a b l e i n t e r e s t c o mp o n e n t s h a s n o t b e e n p o s s i b l e ,
Tho © a l l f e a t u r e i s b e i n g e l i m i n a t e d t© accommodat e m a r k e t demand
f o r t h e s e p a r a t e t r a d i n g o f l o n g e r - t e r m i n t e r e s t components, ,
i a n e f l t s o f STRIPS P r o g r a m 0 Th® STRIPS p r o g r a m w i l l p r o v i d e
a more e f f i c i e n t i n s t r u m e n t f o r th© m a r k e t t h a t ha s d e v e l o p e d
s i n c e 1982 i n g e r o - e o u p o n o b l i g a t i o n s b a s e d on T r e a s u r y s e c u r i t i e s .
f i n e © ml d - 1 9 8 2 * a p p r o x i m a t e l y 165 b i l l i o n o f T r e a s u r y s e c u r i t i e s
( [ p r i n c i p a l v a l u e ) h a v e b e e n ^ s t r i p p e d 6' t o c r e a t e g@r© ©©upon©?
e i t h e r by t h e i s s u a n c e o f s e p a r a t e i n s t r u m e n t © b a s e d on T r e a s u r i e s
o r by th© p h y s i c a l s e p a r a t i o n o f coupon© from b e a r e r T r e a s u r i e s , ,
$©r©-e©up©n s e c u r i t i e s * b e c a u s e t h e y p r o v i d e f o r a s i n g l e
p a y me n t a t a s p e c i f i c d a t e i n th© f u t u r e * hav© become v e r y p o p u l a r
i o r t hos© who w i s h t o a v o i d r e i n v e s t m e n t r i s k o r s e e k g r e a t e r c e r
t a i n t y i n m a t c h i n g t h e m a t u r i t i e s o f t h e i r a s s e t s and l i a b i l i t i e s , ,
They h a v e b e e n p a r t i c u l a r l y a t t r a c t i v e i n v e s t m e n t s f o r I n d i v i d u a l
R e t i r e m e n t A c c o u n t s and p e n s i o n funds,,
Th® T r e a s u r y h a s r e a l i g e d s i g n i f i c a n t s a v i n g s i n f i n a n c i n g
c o s t © from th© g ®r o - e o u p o n i n i t i a t i v e © o f th© p r i v a t © m a r k e t
s i n e © 19 8 2 , wh i c h h a v e b r o a d e n e d th® m a r k e t f o r T r e a s u r y s e c u r i t i e s ,
S e c r e t a r y Regan s t a t e d t h a t STRIPS w i l l g r e a t l y r e d u c e m a r k e t
t r a n s a c t i o n and f i n a n c i n g c o s t s * s t i m u l a t e c o m p e t i t i o n * and f a c i l i
t a t e f u r t h e r e x p a n s i o n o f th© g e r o - e o u p o n mark@t 0 Th© s a v i n g s
mad© p o s s i b l e by STRIPS w i l l b© r e f l e c t e d i n th© c o m p e t i t i v e b i d d i n g
for Treasury securities,,
Issuance of Strippabl© ieeuritiQSo
T r e a s u r y w i l l n o t i t s e l f be
i s s u i n g " g e r o - c o u p o n © © c u r T t l e s u n d e r t h i s new p r o g r a m .
The T r e a s u r y
w i l l c o n t i n u e t o a u c t i o n i t © s e c u r i t i e s i n th© oam© manner ? however*
f o r s e l e c t e d i ssue©* i t w i l l be p o s s i b l e f o r a d e p o s i t o r y f i n a n c i a l
i n s t i t u t i o n t h a t m a in ta in s a book-entry account a t a Federal Reserve
Sank t o r e q u e s t t h a t t h e s e c u r i t i e s b© s e p a r a t e d i n t o t h e i r c o mp o n e n t
p a r t s ( p r i n c i p a l and i n t e r e s t ) , ,
l a e h compone nt w i l l be t r a d a b l e
s e p a r a t e l y and t h u s may b© s e p a r a t e l y ©wned0
F i n a n c i a l i n s t i t u t i o n s w i l l hav© th© o p t i o n t o o b t a i n th©
s e c u r i t i e s a s STRIPS, e i t h e r on th© dat© o f o r i g i n a l i s s u e o r
t h e r o a f t e r 0 however* a l l b i d s mus t be f o r t h e e n t i r e s e c u r i t y *
n o t s e p a r a t e components,,
Thus t h e m a r k e t * n o t t h e T r e a s u r y * w i l l
d e c i d e how much o f th© s e c u r i t i e s w i l l be h e l d a s s t r i p s * b a s e d
on m a r k e t demand,,
minimum Amount s 0 I n o r d e r f o r a b o o k - e n t r y s e c u r i t y t o be
s e p a r a t e d i n t o i t s c ompone nt p a r t s * th© p a r amount o f th© s e c u r i t y
m u s t b© an amount w h i c h , b a s e d on th© s t a t e d i n t e r e s t r a t e o f t h e
s e c u r i t y , w i l l p r o d u c e a s e m i a n n u a l i n t e r e s t payment o f 11*000 o r
a m u l t i p l e o f $1*000,
One© a b o o k - e n t r y s e c u r i t y ha s b e e n s e p a r a t e d * ©aeh i n t e r e s t
3°
ond p r i n c i p a l ©©mponent may b@ m a i n t a i n e d and t r a n s f e r r e d i n m u l t i
p l e s ©2 §1*000,, r e g a r d l e s s o f the p a r amount i n i t i a l l y r e q u i r e d f o r
s e p a r a t i o n ©r the r e s u l t i n g amount ©£ e a c h i n t e r e s t payment*
© © l l a t © r a l , Th© T r e a s u r y a l t o p l a n s t© ®ak© STRIPS e l i g i b l e a s
© © l l a t o r a l f o r T r e a s u r y Tax and Loan a c c o u n t ® and ©th®r p u b l i c m o n i e s
l a t e r i n 1^85* a f t e r th® s y s t e m b©e©m@© f u l l y a u t o m a t e d and th© e u r °
£?ont ^ a l y a t i © n ©£ STRIPS ©an b © r e a d i l y d t f e e r mi nod i n a c o s t - e f f e c t i v e
B anner0
Questions
Nature
Qo
and A n s we r s
on STRIPS
and Purpose of STRIPS
What
is the STRIPS program?
A.
The STRIPS (Separate Trading of Re gi stered Interest and Principal
of Securities) p r o g ra m is a new f a c i l i ty that will enable depository
financial ins ti tutions that m a i n t a i n bo ok -e n tr y security accounts at
the Federal Re serve Banks to r e q u e s t that eligible se cu rities be
sep ar at ed into their component p a r t s (principal and interest),,
When
the compo nen ts are held separately* each component will be identified
by its ow n unique CU SIP number, d i f f e r e n t from the CUSIP number
as sig ned to the fully co nstitu ted security,,
Each component will
then be trad ab le separately un der its own CUSIP number and ma rk et ab le
as a se ro- cou pon instrument in the s e con da ry market,,
(In the case
of a call abl e bond, one CUSIP n u m b e r would be assigned to the co mpo
nents con sti tut ing the principal and all interest payments contingent
on the bond not being called.)
Qo
What does CU SIP mean?
A.
A CUSIP number is a standard nu mb er i n g me thod for identifying
securitieso
It was de veloped by the A m e r ic a n Bankers A s so c i at ion 's
Co m m i t t e e on U n i f o r m Securities Id e n t if i c a ti o n Procedures (CUSIP).
The ass ignment of CU SIP number s is m a d e by the CUSIP Service Bureau,
o p e ra te d by Stan da rd and Poor's.
Qo
Will there be different CUSIP numbers for components due on the
same date but stripp ed from d i f f e r e n t sec ur ity .issues?
A.
Yes.
Qo
Why
is the Tr ea su r y es tab l i s h in g
this new program?
A 0 The po p ul a r i t y of stripped T r ea s u r y securities in recent years
has been a ma jo r development in the gover nm ent securities market.
Since mid-1982, ap pr o xi ma t el y $45 b i ll io n (principal value) of
T r e a su ry sec urities has been s t rip pe d either by the issuance of
rece ip ts based on them or by the phy si cal separation of coupons
from bea rer securities.
This cre at ion of zero-coupon securities
has benefitted the Treasury by b r o a d e ni n g the appeal of Treasury
securitieso
To further build on this pro gr ess Treasury decided to
prov ide STRIPS as a mo re efficient me t ho d for trading for the zerocou pon market and thus lower the cost of financing the public
debto
In the past, T re as ury d i s a p p r ov e d of stripping Treasury
securities.
Now it is offering the m a r k e t an improved way to strip
securities.
Why the change?
Q o
A.
Prior to June
1982,
the T r e a s u r y Department disap pr ove d of coupon
-2 -
st ri ppi ng be cau se tax pa ye rs could m a i n t a i n that various transactions
involving st ripped securities resulted in a lower tax liability.
On
June 9, 1982, the Tr easury D ep art me nt an nounced that it would seek
to amend the Internal Revenue Code to deal with coupon stripping.
Th es e coupon stripping p r o v i s i o n s were in co rporated in the Tax Equity
and Fiscal R e s p o n s i bi l i t y Act of 1982.
Treasury then withdrew its
o b j e c t i o n to co upo n stripping and, in fact, viewed the creativity
of the investment comm un ity in p r od u c i ng ze ro -coupon instruments
b ase d on T r e as ur y secu ri tie s as b e ne fi ci al to Tr e as u r y debt m a n a
gement.
As a natural further step to take ad va ntage of the large
new m a r k e t for ze ro- cou po n securities, the T r e a s u ry is now pro viding
a m o r e effi cie nt m e c h a n i s m for the se co n d ar y m a r k et to strip T re a su ry
securities.
Qo
W hat
are the a tt ra ct io ns of
z e ro -c ou po n securities?
A.
The absence of per io dic cash p a ym en ts on zero-coupon sec urities
is an a dv an tag e to those who wish to avoid reinvestment risk and
the n e c e ss it y of finding an a p p r o pr i a t e reinvestment vehicle for
ea ch interest payment.
(This is, of course, a disadv an tag e to those
n e e d i n g cash flow in or de r to m ee t cu rrent expenses, including taxes
on acc rued interest.)
Zeros are also much more price volatile
than par value bonds of equal m at uri ty , which appeals to speculators.
Because zeros are taxed c u rr e n t ly and have a long duration,
the m a i n m a r k e t for them d o m e s t i c a l l y is composed of long-term
investors w i t h n on -t ax ab le or tax de f er r e d a c c o u n t s . Individuals
have used low d e n o mi n a ti o n zero co upons as investments for their
In di vidual Re tir e me nt A c co u n t s and Keogh Plans and as gif ts to
thei r children.
Pe nsion funds have used zero coupons as part of
the ir im mun i za ti o n str at eg y with respect to their long-term
liabilities.
Zeros are a l s o useful for corporate debt defeasance.
I ndi vi dua ls who have found the $10,000 m i n i m u m on Treasury's
sh o r t - t e r m bills too high will now be able to purchase through the
se c o n d a r y m a r k e t interest c om pon en ts due in the ne ar -term in $1,000
denomin at ion s.
Q„
Why is the Treasury
not
selling
zero-coupon securities dir ectly?
A.
The investment c om m u n i ty will be better able to offer zero-coupon
in st ru men ts that meet p a r t i c u l a r needs in a timely manner.
The market
for z er o- c ou po n securities is a ra pidly changing one.
The demand
v a r i e s su bs t an ti a ll y for p a r t i c u l a r ma t u r it i e s and with changes in
int erest rates and in the needs of various investor classes.
There
is not always a cost adv an tag e to issuing zero coupons.
This changing
d e m a n d for zeros will be best a c co mm oda te d by the STRIPS approach of
m a k i n g a broad range of m a t u r i t i e s el igible for stripping but leaving
it to the m a r k e t to decide when and how much of an issue it will s ep a
rate and m a r k e t as z er o- co up on instruments.
-3 -
El igi ble
Institutions
0.
Who will
STRIPS form?
be able to request
the separ at ion of a security
into
A.
De p os i t o r y institutions with b o ok -e nt ry securities accounts at
Fed er al Res erve Banks will be able to request that their own securities
and tho se of their customers that hold bo o k - en t r y securities through
th es e ins t it ut io n s be converted into STRIPS f o r m 0
Qo
Wi ll an individual be able to buy a single
c o m p o n e n t di r e c t l y from the Tr ea su r y ?
interest or principal
N o 0 The STRIPS pr ogr am is des ig ned to facilitate the stripping
of T r e a s u r y securities by p ri va te m a r k e t participants.
Individuals
and o t h e r investors will be able to hold stripped interest or principal
c o m p o n e n t s through a p ri vat e broker or financial institution that is
d i r e c t l y or indirectly linked to the bo o k - en t r y accounts ma in ta i ne d
at F ed er al Reserve Banks,
ho
Qo
Will
for eigners be allowed
to hold STRIPS?
A.
Yes,
Foreigners, like U.S, investors, will be able to hold
STR IP S through financial institutions.
Foreign financial institutions
will be able to hold STRIPS through a de p o s it o r y institution with
a b o o k - e n t r y securities account at a Federal Reserve Bank,
Procedures
0.
What will be the proce dur es
o bt ai n STRIPS?
for a d ep osi to ry
institution to
A.
Al o n g with the auction results of a note or bond eligible for
str ipping, the T re asu ry will an nounce the m i n i m u m amount of the
s e c u ri ty required in order to hold the security in separate component
parts.
This amount is a function of the interest rate and is chosen
so that pay m en t s can be furthe r divided for trading purposes into
even $1, 000 (final payment value) amounts.
(See attached table.)
To
obt ain STRIPS, an institution must have the m i n i m u m amount specified
for a p a r t i c u l a r issue, or an integral m u l t i p le of that amount.
The table shows that a security with a 12 percent interest rate
re qu i r e s a m i n i mu m amount (par value) of $50,000 in order to result
in i n t e r e s t components in even $1,000 amounts.
That is, a holder of
$ 5 0, 0 00 par amount of T r ea s ur y securities could convert them at a
Fede ral Reserve Bank for STRIPS obtaining separate interest components
of $3,000,
The holder could then transfer to others on the book-entry
sys te m any of the separate $3,000 semiannual interest components, or he
could tra nsfer amounts as small as $1,000.
As another example, an
11-7/8 perc en t interest rate requires a m i ni m u m exchange of $ 3 2 0 , 0 0 0 ,
which wo uld produce interest pa yments of $19,000.
These could then
be sold se par ate ly as a $19,000 interest component or as 19 separate
-4-
$ 1, 00 0 interest components.
The interest co m po n e n ts could also be
sold in integral m u l t ip le s of $1000.
The table shows that, for
int ere st rates from 5 p er ce nt to 20 percent, the range of m i n im um
e x c h a n g e am oun ts runs from $10,000 to $1*6 million*
A f t e r the auction, fi nancial institutions that have been awarded
s e c u r i t i e s ma y request that, as of the issue date, some or all of
th eir a l l o t me n t be held as ST RIPS (the amount m u s t c o nf or m 'with
the m i n i m u m and m ul t i p l e s that have been a n n o u n c e d ) e
In addition, el ig ib l e fi na ncial institutions m a y co nvert their
h o l d i n g s of el ig ib l e T r e a s u r y securities to STRIP S s u bs eq ue nt to
the issue date (again, in c o n f o r m a nc e with the r e qui re d minimums).
The request for c o n v e r s i o n must be made to the Federal Reserve
B a n k hold in g the se cu ri t ie s to be converted into STRIPS and must be
in the form sp ec i fi ed by that Bank,
Depository in st itu ti ons should
c o n s u l t their Federal Re serve Bank for more sp ecific information*
Th e Fede ra l Res erv e Bank at wh ic h the request is m a d e will inform
the fin ancial insti tut io n of the specific date on which the c o n v e r
sion will be ac complished, wh ic h will be no later than three business
da ys aft er the request is received.
Qo
Will
A.
Yes.
STRIPS be a va il abl e
in all Federal
Qo
Will there be a fee c ha rg ed
to STRIPS?
Re serve Districts?
for conversion of T r e a su r y securities
A*
N o 0 Tr easury does not now charge a fee for co nv er s io n of
se cu ri t ie s, e 0g., from d e f i n i t i v e to book-entry form, and does not
p l a n to charge a fee for the STRIPS conversion.
0.
Will there be a fee for each
Fe d er al Reserve fa cilities?
transfer of STRIPS
through
the
A*
Yes.
Book entry tra nsf er of interest or prin ci pal components
w il l be subject to the same fee schedule a pp lic ab le for the transfer
of Tr e a s u r y securities.
Qo
O nc e a security is in ST RIPS form, what is the m i n i m u m amount of
p r i n c i p a l or interest that can be transferred?
A.
The m i n i m u m amount will be $1000 (final pa yment
am o un ts must be in integral m u l t i p l e s of $1000.
value).
Larger
Q.
O nc e a se curity is se pa r a te d into its component parts, can
be reasse mb le d and held un de r the CUSIP number for the fully
co n st i t u t e d security?
it
-5 -
A.
Tre
and th
..ins to m ake such a facility a v a i l ab l e
system develops.
as the market
X
y
Q.
TRIPS be av ail ab le
in definitive
form?
A,
rT. , Only se curities in book-entry form will be convertible into
S T R I P S form.
N o p ro vi s io n will be made for c o nv e r t i n g a STRIPS compo?K.nt once s ep ar a te d on the book-entry sy st em to de f i n it i v e form.
An im p or t a nt p u r p o s e of STRIPS is to reduce the v o l u m e of definitive
s e c u r i t i e s and the related paperwork costs.
Qo
W i l l g o v e r n m e n t se cu ri ti e s dealers be able to finance a security
for the time b et we e n a request for co nv ersion into STRIPS and
c o m p l e t i o n of the co nv er s i o n by a Federal Re serve Bank with repurchase
agreements?
A.
A g o v e r n m e n t secu rit ies dealer will be able to finance securities
a w a i t i n g c o nv e rs io n with a repurchase a g ree me nt but m us t assure
that the se cu ri t y is returned to the pr op er account at the Federal
R e s e r v e Bank on the day the conversion is to be done in order for
that c o n v e r s i o n to take place.
E l i g i b l e S ecu ri tie s
Qo
For what T re a s u r y secu r it ies will the ST RI PS p r o gr a m be available?
A.
In general, Tr ea su r y plans to make the STRIPS p r og r a m available
for new secu ri tie s with 10 or more years of or iginal maturity.
Initially, it will be a vai lab le for the 10 -y ear and 30-year securities
to be issued as part of the quarterly re fu nding on February 15, 1985.
Then, T r e a su ry plans to make STRIPS av ai lable for the 10-year note
and 30-year bond issued on November 15, 1984.
Also, the 20-year bond
m a t u r i n g N o v e m b e r 15, 2004 will become e l ig i b l e for STRIPS effective
soon after the first interest payment on May 15, 1985.
As experience
de velops , ST RI P S m a y be m ad e available for ot he r securities that have
a l r e a d y been issued.
Q.
When will
ava ilable?
the CUSIP numbers
A.
At the time of
198 5 c
for the Fe b ru a r y 15
the announcement of these
Qo
Why is the STRIPS p ro gr am not being made
se cur iti es?
A.
There is little m ar k e t
ties with m a t u r i t i e s under
interest at this
10 years.
issues
Will r eo pe ned
secu rit ie s
be eligible
on January 30,
av ai la b l e
time
for short-term
in stripping
)
Qo
issues be made
for STRIPS?
securi
-6 -
A»
Yes.
However, we do not p la n to reopen notes and bonds issued
before July 1984, because of their different tax treatment due to
the pr ov is ion s in the Tax Re fo rm Act of 1984 r e ga r d i ng market
disc ou nt and the 30% foreign withholding t a x 0
Q0
How will
15,
1984?
STRIP S be app li ed
to the callable bond
issued November
Ao
The pr inc ip a l p ay men t of the bond together w it h all interest pay
me n t s due after the first call date will be t r ea te d as a single
co m po ne nt and will be assig ne d one CUSIP n u m b e r 0
Po st °call date in
terest pa ym en t s cannot be separated from the principal,,
Re po rt in g
Q°
Will
the amount of s ec uri ti es
in STRIPS
form be reported?
Ao
Y e s 0 The M o n t hl y State me nt of the Public Debt will
amount held in STRIPS form by security i s s u e B
Qo
Will
the new STRIPS p r o gr a m affect the debt
report
the
limit?
Ao
No.
There will be no change in the amounts or timing of Treasury
debt issues and thus no change in the accounting for debt limit
purposeso
Qo
Will d ail y yi eld s on STRIPS be made available,
Tre a su ry notes and bonds?
as they are on
Ao
The a v ai l ab il i ty of quotes will depend on m a r k e t a c t i v i t y 0 We
ex pec t that, once a liquid ma r ke t for STRIPS d ev elo ps , the Federal
Re serve Bank of Ne w York will collect from g o v e r n m e n t security
dea ler s price and yield information on the most active maturities.
Collateral
Qo
Will the c om po nen t parts of Treasury s e c u r i ti e s in the STRIPS
p r o g r a m be e l ig i bl e colla te ral for Tre as ury Tax and Loan accounts?
A.
Initially, they will not be.
Once a system is in Pi ace for the
T r e a s u r y to v alu e these comp on ent parts at their final payment value
m i n u s an a p p r op ri a te d is c o u n t depending on the le ng t h of time
until payment is due, then they will become e l i g i b l e collateral
for TT &L accountSo
This should be in place later in 1 9 8 5 0
Qo
Will the c o m p on en t parts of Treasury s e c u r i ti e s in the STRIPS
p r o g r a m be e l ig i bl e co ll ateral for advances from Federal Reserve B ank
dis c ou nt win dow s?
Ao
This d e t e r m i n a t i o n will be made by the Fe deral
Reserve.
Wife_
“ 7-
Q.
Will
STRIPS?
t
A.
Initi?
STRIPS,
buy and s
®o
Will
ral Reserve conduct open m a r k e t o p e r a t io n s with
they will not.
When a liquid m a r k e t dev el ops for
11 be up to the Federal Reserve to de cide wh ether to
1 ST RIP S as part of their conduct of m o n e t a r y policy.
STR IP S be used
in re pu rchase ag re ements?
A 0 M a r k e t p a r t i c i p a n t s will dete rm in e this.
The T r e a s u r y has no
o b j e c t i o n 0 However, it should be noted that z e ro - c o u p o n securities
are sold at s ub st a nt ia l discounts and their pr ices are m o re volatile
than o t h e r s e cu r it ie s of equal m a t u r i t y 0
Taxation
0.
How are str ipp ed
interest and principal
c o m p o n en t s
to be taxed?
A.
The st r ip pe d bond rules of the Internal R e ve nu e Code will be
a p p l ic ab l e to STRIPS.
In brief, a financial i n st it ut io n that has
ob ta ine d all or a p or tio n of its holdings of a T r ea s u r y security
in st rip pab le form will be considered to have str ip ped the amount
of pr in cip al a l l o c a b l e to the STRIPS co mp onents sold at the time of
d i s p o s i t i o n of one or more STRIPS components.
For example, if a
financial in s ti t ut io n has obtained $1.6 m i l l i o n of a 10% Treasury
sec uri ty in s t r i p p a b l e form and it sells a $1,000 interest payment,
the financial i ns ti tu tio n would be considered to have stripped a
$20,000 Tr e a s u r y security.
In order to compute g a i n or loss on
the sale of a ST RI PS component, the financial insti tu tio n must
all oc a te its ba sis immediately before the d i s p o s i t i o n among the
co m p o n e n t s re ta in ed by the institution and the co mp on e nt s disposed
of on the basis of their respective fair ma r ke t values.
Thus, in
the ex a mp le the financial institution would re co g n iz e gain or loss
on the $1,000 ST RI P S component it has sold by al lo ca t in g an a pp rop ria te
p o r t i o n of its basis in the $1.6 m i l li o n of the T r e a s u ry security
to the $1,000 i nt ere st payment sold.
The STRIPS co mp on e nt s retained
(e ,g . , the rema in ing components of the $20,000 T r ea s u r y security in
the exam ple above) by the institution with respect to the stripped
sec ur i ty will be consi der ed to be di scount obliga ti ons ; a portion
of this discount, ca lculated according to a c o mp ou nd interest formula,
m u s t be taken into account each year by the holder.
Similarly, a
p u r c h a s e r of a ST RIP S component includes in t a xa bl e income each year
a p o r t i o n of the d i ff e re nc e between his p u rc ha se pr i c e and the m a t u r
ing va lue of the obligation.
This portion is d e t e r m i n e d by a compound
in te res t formula.
Capital gains and losses r e c o g n iz e d by holders
upo n a taxable d is p o s i t i o n of STRIPS c om pon en ts are calculated with
re f e r e n c e to the a dj us ted basis of the STRIPS components, which is
equal to its a c q u i s i t i o n price (or in the case of the perso n stripping
the bond, the a ll oc a te d portion of the basis in the bond) plus the
p o r t i o n of the d is c o u n t that has been included in taxable income for
the holding period.
(The holding period for the financial institution
st ri pp in g the bond begins when it acquires the bond, whether or not
in ST RIP S form.)
-8 -
Qo
Are sh ort-term STRIPS c o m p o n en t s (due within on: year)
for dome st ic pu rposes the same way as Tr e as u r y bills?
A0
YeSo
Qo
How are cal lab le STRIPS to be taxed?
taxed
A 0 Tax regul ati on s covering this subject will be issued in the near
f u t u r e G It is antic ipa te d that, ac co rding to these regulations,
si p u r c h a s e r of a callable ST RI PS will calculate, based on his a c q u i
sit i on p r i c e , both the yield to the first call date and the yield
to final maturity,.
W h i c h e v e r yi eld is less will be used to de ter mi ne
the p o r t io n of the di ffe re n c e between the principal value and the
a c q u is i t io n pr ice that is to be included in taxable income each year.
If all the di sc ou n t has been included in taxable income by the first
call date and the bond is not called, then subsequent interest p a y
me n t s are taxed in the year they are paid.
Qo
How is interest to be repo rt ed on STRIPS
to the IRS?
A 0 For purpos es of complying with the br ok er reporting require men ts ,
P u b l ic a t io n 1212 curr ent ly su pplies b r ok er s and other m i d d l e m e n wi th
the amount of d is co unt to be reported for particular or iginal issue
d i s c o u n t se curities and for rece ip ts such as CATS and TIGRs.
Wi th
CATS and TIGRs d is cou nt is c al cul at ed for reporting pu rposes by
ref erencing the or iginal issue price.
Since STRIPS can be cre ated
at any time, rather than issued all at once as are p a rt ic ul ar CATS
and T I GR series, we plan to p r o m u l ga t e each year for report ing
pu r pos es prices and amount of disc ou nt to be reported for all po ss ib le
m a t u r i t y dates.
We will initially do this by calculating prices for
a parti cu lar date for zero- co upo n o b l i ga t i o ns according to an e s t a
blis he d Tr ea su r y pr icing me th odology; once a liquid ma r ke t dev el op s
for these instruments we may s u b s e q ue n t l y be able to use mar ket
pri ces as of a p a rt i cu la r date.
Under this arrangement, the amount
of dis cou nt reported for STRIPS will be calculated based on a new
co m pu ta ti o n of the price each year and wit ho ut reference to the year
an individual acquired the obligation.
It should be e mp has iz ed that
the amount of d is cou nt being d i scu ss ed here is for reporting purpo ses
only, and it will g en er al ly not be equal to the amount of d isc ou nt
in clud ible in income for a p a rt i c u l a r taxpayer.
Qo
Can STRIPS be held
in Individual
A 0 Yes, STRIPS are pe rm is s i b le
r et ir eme nt plans.
R et ire me nt Ac counts
in ve stments
or Keogh Plans:
for these tax d eferred
Qo
Will foreign holdings of STRIPS be e l ig ib le for the "por tfo lio
interest" e xe mp t io n from the 30 pe rcent wi th holding tax on interest
paid to foreign persons?
-9 D is c ;
income on STRIPS from bonds issued after J ul y 18, 1984,
is elic
for the p o r t f o l i o interest exemption from the 30
percent
on interest paid to foreign persons if the re qu ir e me nt s
for pc
olio interest are s a tis fi ed with respect to STRIP S held
by a £
sign person.
Thus, for example, the foreign be ne ficial
o w n e r must be identified by name.
In addition, other a p pl i c a b l e
c o n d i t i o n s for p or tf o li o in t er e s t specified in regul at ion s m u s t be
satisfied.
Ao
M IN IM U M
FACE AMOUNTS W H IC H
COUPON
<S>
5.000
b . 12b
5.250
b . J 7S
b .300
b o © 2b
b . 7bO
b . 07b
0.000
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o . 2bO
o . J 7b
6 . bOO
o . 62b
6 . 7bO
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7.000
7. 12b
7. 2bO
7. 37b
7. bOO
7. 02b
7. 7bO
7 . 87b
b .O ( X )
« . 12b
0 . 2bO
0. 3/ b
0 . bOO
0 . 62b
0 . 7bO
b . b 7b
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9 . 2bO
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9. 02b
9.7 bO
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($ )
40000. (X)
1600000. (X)
bOOOOO.OO
1600000.00
400000.00
320000. OO
bOOOOO.OO
lo o o o o o .o o
100000.00
loO O O O O .O O
32(XX ).00
1600000.00
A 00000.00
S 600000. 00
bOOOOO.OO
320000.00
200000.00
1600000. (X)
b o o o o o .o o
1600000.00
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I 600( X X ).U 0
000OOO. OO
lo o o o o u .u o
2bO O O .UO
320000. 00
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1OOO OOO. 00
400000.00
1600000. (X)
160000. 00
1600000.00
200000.00
1600000. 00
b o o o o o .o o
64000.00
400000. CM)
1600000.00
booooo.oo
1600000.00
20000.00
ARE
m U L ,T IP L E S
IN T E R E S T
PAYMENT
(S )
1000.00
41000.00
2 1OOO. 00
43000.00
11000.00
9000.00
23000.00
47000.00
3000.00
49000.00
1000.00
b l OOO. 00
13000.00
b 300Q .00
27000.00
11000.00
7000.00
S 7000.00
29000.00
bQOOO.OO
3000.00
61000.00
31 OOO. 00
63000.00
6000.00
13000. (X)
33000 .CM)
67000.00
17000.00
69000.00
7000. 00
71000.00
9000.00
73000.00
370< X ).O 0
3CMX). 00
190(X ). 00
770(X).()0
39000.00
79000.00
1OOO. 00
OF
S I OOO R E Q U IR E D
COUPON
(*>
IN
ORDER T O
M IN IM U M
FACE
(S )
10. 12b
I 0 . 2SO
10. 37b
| 60(X) 00.( X )
b o c x jo n .o o
160CX)00.00
lO .b f X )
10. 62b
10. 7bO
10. 07b
400000.00
320000.00
000000.00
160U 0U0.00
200000.00
11.000
11. 12b
11, 2bO
11. 37b
11.b O O
11.62b
1I . 7b 0
11, 07b
12.000
12. 12b
I 2. 2b 0
12. 37b
12.500
12. 62b
12.750
12. 07b
13.000
13. 12b
13. 2bO
13. 3 / b
13.500
13. 62b
13. 7bO
13. 07b
14. OCX)
14.125
14.250
14. 3 / b
14.500
14. 62b
14.750
14. 0 / b
l b . OCX)
l b . 12b
loO O O CX).(X)
I 600UO.CX)
1600000. IX)
4000( 1) . 00
1600000.00
800000.00
320000.00
b 0000.00
1600000.00
0 OOOOO.CX)
I 6000CX). 00
1ODCX). (X)
lOOOOOO.CX)
b(KX)O O .CX)
1600000.00
200000.00
320000.00
000000.00
1600000.00
400000. CX)
1600000.00
I 6 (X)Q0.()0
16 ()()()(X). 00
100000.00
1600000.00
800000.00
320000.00
4U 0000.CX)
1600000. (X)
800000. (X)
I 6000CX). (X)
4IX J 00.00
1600000.00
PRODUCE
IN T E R E S T PAYM EN TS T H A T ARE M U L T IP L E S
IN T E R E S T
payment
( S)
b lo o o . oo
41000.00
83000.00
21 OOO.00
17000. (X)
43CMX). 00
87000. (X)
1K )C X ).(X )
89000.00
9000. 00
91000.00
23000. 00
93000.00
47000.00
19000.00
3000.00
97 OCX).(X)
49000.00
99000.00
1OOO.00
101OOO.00
51000.00
103000.00
13000. 00
2 1OOO. 00
53000.00
10/OCX) . (X)
2 7OCX). 00
109000.00
1I 0(X).00
111OOO. 00
7000.00
11 3000.CX)
570CX). CX)
23000. (X)
290CX). 00
117OOO. ( X)
5901X) .00
119000.00
3000.00
121000.00
COUPON
<*>
.250
15.375
15.500
15.625
15.750
15. 87b
16.000
16. 12b
16. 2bO
16. 37b
I 6 . 5CX)
16.625
16. 7bO
16.875
17. (XX)
17.125
17.250
17.375
17.500
1/ . 625
17.750
17.875
lb
I d .( X X )
18. 125
18.250
18.375
18.500
18.625
18.750
18.875
19.000
19.125
19.250
19.375
19.500
19.025
19.750
19. 87b
20.000
20. , 12b
20. 2bO
FACE
(SI
000000.00
I 6CX)OOO.CX)
400000.00
64000.00
800000.00
1600000.00
2bO UO .00
1600000.00
160000. CX)
1600000.00
400000.00
1600000.00
800000.00
320000.00
200000.00
1600000.00
800000.00
1600000. 00
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1600000. CX)
«CH)000.00
1600000. (X)
B(X)OOO. 00
J 20000.00
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1600000.00
400000.00
1600000.00
32000.00
lO(X)OOO.OC)
2000CX). 00
1600000.00
800000.00
320000.00
400000 c 00
0000000.00
800000,00
1600000. iX)
loocx).(X)
1600000.00
800000.00
OF s 1 0 0 0 .
IN T E R E S T
PAYMENT
< S)
61 (X X ). 00
I 23UOO .00
31 000,00
bO UO .O O
63000. (X)
127000.00
2000.00
129000.00
13000.00
I JI O O O .U O
33000.00
133000.00
67000.00
27000.00
17000.00
137000.00
69000.00
139000.00
7000.00
141000.00
7I 0U0.00
143000.00
9000.00
29000.00
73000.00
14/ 000.00
370(H ). 00
I 4VOOO.OO
3000.00
1510(H), 00
19000. OO
153000.00
77000. (X)
31 OOO. 00
39000.00
157OCX). 00
79000. (X)
159000.00
1000. UO
161000.00
01 000.00
@FedFRASER