Appendix C to Part 356 - Investment Considerations
31:2.1.1.1.53.6.17.1.14 : Appendix C
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 non-indexed 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 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 §
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 non-indexed securities. In
addition, Treasury inflation-protected securities may not be as
widely traded or as well understood as Treasury non-indexed
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
non-indexed 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.
II. Floating Rate Notes A. Interest Variability
An investment in securities with interest determined by
reference to a 13-week Treasury bill index involves risks not
associated with an investment in a fixed interest rate security.
Such risks include the possibility that:
• Changes in the index may or may not correlate to changes in
interest rates generally or with changes in other indexes;
• any given interest payment may be more or less than the amount
paid on prior interest payment dates;
• the resulting interest payments may be greater or less than
those payable on other securities of similar maturities, and
• in the event of sustained falling interest rates, the amount
of the quarterly interest payments will decrease.
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 floating
rate notes, however, may not be as active or liquid as the market
for Treasury non-indexed securities or Treasury inflation-protected
securities. In addition, Treasury floating rate notes may not be as
widely traded or as well understood as these other types of
Treasury marketable securities. Prices for floating rate notes may
not fluctuate in reaction to interest rate movements in the same
manner as other Treasury securities. Lesser liquidity and fewer
market participants may result in larger spreads between bid and
asked prices for Treasury floating rate notes than the bid-asked
spreads for other Treasury marketable 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 a
Treasury floating rate note may be enhanced over time as we issue
additional amounts or more entities participate in the market.
C. Tax Considerations
Treasury floating rate notes are subject to specific tax rules
provided by Treasury regulations issued under section 1275(d) of
the Internal Revenue Code of 1986, as amended.
D. Indexing Issues
The Bureau of the Fiscal Service publishes the High Rate
immediately following a 13-week bill auction as part of the auction
results. The 13-week bill is generally auctioned once per week.
Treasury retains the flexibility to increase or decrease the
frequency of 13-week bill auctions, which would affect the
frequency of index rate resets. The High Rate is subject to various
interest rate and market environments over which Treasury has no
control. For a discussion of actions that Treasury would take in
the event auctions of 13-week bills are discontinued or delayed,
see appendix B, section I, paragraph C.4 of this part.
[69 FR 45202, July 28, 2004, as amended at 78 FR 46428, 46444, July
31, 2013]