Appendix B to Part 344 - Formula for Determining Redemption Value for Securities Subscribed for and Early-Redeemed On or After October 28, 1996
31:2.1.1.1.43.6.7.1.9 : Appendix B
Appendix B to Part 344 - Formula for Determining Redemption Value
for Securities Subscribed for and Early-Redeemed On or After
October 28, 1996
(a) This formula results in a premium or discount to the issuer
depending on whether the current Treasury borrowing rate at the
time of early redemption is lower or higher than the stated
interest rate of the early-redeemed SLGS security. The total
redemption value for bonds and notes can be determined by the
following two steps. First, calculate accrued interest payable in
accordance with § 344.6(d)(1) using the following formula:
Second,
calculate the redemption value per § 344.6(d)(2) using the
following formula:
(b) The application of this formula can be illustrated by the
following examples:
(1) The first example is for a redemption at a premium.
(i) Assume that an $800,000 2-year note is issued on December
10, 1996, to mature on December 10, 1998. Interest is payable at a
rate of 7% on June 10 and December 10.
(ii) Assume that the note is redeemed on October 21, 1997, and
that the current borrowing rate for Treasury at that time for the
remaining period of 1 year and 50 days is 6.25%.
(iii) The redemption value is computed as follows. First, the
accrued interest payable is calculated as:
Then, the redemption value is calculated as:
(2) The second example is for a redemption at a discount and it
uses the same assumptions as the first example, except the current
Treasury borrowing cost is assumed to be 8.00%:
(i) Assume that an $800,000 2-year note is issued on December
10, 1996, to mature on December 10, 1998. Interest is payable at a
rate of 7% on June 10 and December 10.
(ii) Assume that the note is redeemed on October 21, 1997, and
that the current borrowing rate for Treasury at that time for the
remaining period of 1 year and 50 days is 8.00%.
(iii) The redemption value is computed as follows.
First, the accrued interest payable is calculated as:
Then, the redemption value is calculated as:
(c) The total redemption value for certificates of indebtedness
can be determined by the following two steps. First, calculate
accrued interest payable in accordance with § 344.6(d)(1) using the
following formula:
Second, calculate the redemption value per § 344.6(d)(2) using
the following equation:
(d) The application of this formula can be illustrated by the
following examples.
(1) First, for a redemption at a premium:
(i) Assume that a $300,000 security is issued on December 5,
1996, to mature in 151 days on May 5, 1997. Interest at a rate of
5% is payable at maturity.
(ii) Assume that the security is redeemed on April 9, 1997, and
that the current borrowing rate for Treasury at that time for the
remaining period of 26 days is 4.00%.
(iii) The redemption value is computed as follows.
First, the accrued interest payable is calculated as:
Then, the redemption value is calculated as:
(2) Secondly, for a redemption at a discount:
(i) Assume that a $300,000 security is issued on December 5,
1996, to mature in 151 days on May 5, 1997. Interest at a rate of
5% is payable at maturity.
(ii) Assume that the security is redeemed on April 9, 1997, and
that the current borrowing rate for Treasury at that time for the
remaining period of 26 days is 6.25%.
(iii) The redemption value is computed as follows.
First, the accrued interest payable is calculated as:
Then, the redemption value is calculated as:
