Treasury Inflation Protected Securities

andZero Coupon Bonds

Amy PattersonAmy Patterson

Federal Investments BranchFederal Investments Branch

Bureau of the Public DebtBureau of the Public Debt

April 12, 2007April 12, 2007

What is a TIPS? (In the Government Account Series (GAS) Program)

Treasury Inflation Protected Security (TIPS) Treasury Inflation Protected Security (TIPS) mirror-image market-based note or bond designed to protect mirror-image market-based note or bond designed to protect

investors from inflation investors from inflation principal of a TIPS increases with inflation and decreases with principal of a TIPS increases with inflation and decreases with

deflation, as measured by the Consumer Price Index (CPI)deflation, as measured by the Consumer Price Index (CPI) has a stated rate of interest payable semiannually that is applied to has a stated rate of interest payable semiannually that is applied to

the inflation-adjusted principal the inflation-adjusted principal purchased or redeemed at inflation-adjusted premium or discountpurchased or redeemed at inflation-adjusted premium or discount currently auctioned with 5, 10, or 20 year maturitiescurrently auctioned with 5, 10, or 20 year maturities matures at the higher of the inflation-adjusted principal or original matures at the higher of the inflation-adjusted principal or original

principal (not less) principal (not less)

What is a ZCB? (In the Government Account Series (GAS) Program)

Zero Coupon Bond (ZCB or Zero) Zero Coupon Bond (ZCB or Zero) market-based bond having a maturity date that coincides with that market-based bond having a maturity date that coincides with that

of a marketable STRIPS security.of a marketable STRIPS security. Does not have interest paymentsDoes not have interest payments Purchased or redeemed at a discount Purchased or redeemed at a discount Matures at Par Matures at Par Maturity date over 5 yearsMaturity date over 5 years

Note: (STRIPS is for Separate Trading of Registered Note: (STRIPS is for Separate Trading of Registered Interest and Principal of Securities. A STRIPS security is a Interest and Principal of Securities. A STRIPS security is a principal or interest component of an eligible Treasury Note principal or interest component of an eligible Treasury Note or Bond that has been stripped off and can be held or traded or Bond that has been stripped off and can be held or traded separately in the secondary market. STRIPS are not issued separately in the secondary market. STRIPS are not issued by Treasury)by Treasury)

Who may invest in them?

TIPS securities may be purchased by all of TIPS securities may be purchased by all of the GAS program agenciesthe GAS program agencies

ZCB securities may only be purchased by ZCB securities may only be purchased by an agency that has entered into a written an agency that has entered into a written memorandum of understanding (MOU) memorandum of understanding (MOU) with Treasury with Treasury

Agencies with MOU for Zeros:

Pension Benefit Guaranty Corporation (PBGC)Pension Benefit Guaranty Corporation (PBGC) Department of Energy (DOE) Department of Energy (DOE) Federal Deposit Insurance Corporation (FDIC)Federal Deposit Insurance Corporation (FDIC) Department of Defense (DOD)Department of Defense (DOD) Railroad Retirement Board (RRB)Railroad Retirement Board (RRB)

However, only However, only two two of these agencies hold of these agencies hold ZCB securities currentlyZCB securities currently

Therefore…

We are going to cover TIPS first and when we get to the Zeros please feel free to take a break if you want!

More about TIPS…

Investors buy TIPS Securities at lower yields because their Investors buy TIPS Securities at lower yields because their return is protected if an era of high inflation is encountered return is protected if an era of high inflation is encountered that would erode the value of traditional note or bondsthat would erode the value of traditional note or bonds

General expectation is that inflation will increase over timeGeneral expectation is that inflation will increase over time On a daily basis, the Investor’s principal of the TIPS On a daily basis, the Investor’s principal of the TIPS

security is adjusted for inflation security is adjusted for inflation When interest is paid to the Investor it is calculated on the When interest is paid to the Investor it is calculated on the

inflated principal value inflated principal value Therefore, as long as inflation increases, the Investor’s Therefore, as long as inflation increases, the Investor’s

Interest Revenue increases Interest Revenue increases

Things to consider…PROSPROS

Upon early redemption, after a Upon early redemption, after a period of period of inflationinflation, the cash , the cash received for the PAR would be received for the PAR would be greatergreater than the original PAR than the original PAR valuevalue

Upon early redemption, after a Upon early redemption, after a period of period of inflationinflation, interest , interest received and any received and any premium/discount would be premium/discount would be calculated on an calculated on an inflated PAR inflated PAR valuevalue

Semi Annual interest payments, Semi Annual interest payments, after a period of after a period of inflationinflation, would , would be computed on a be computed on a inflated PAR inflated PAR valuevalue

If held to maturityIf held to maturity, the cash , the cash received for PAR will never be received for PAR will never be less than the original PAR even less than the original PAR even in deflationin deflation

CONSCONS Upon early redemption, after a Upon early redemption, after a

period of period of deflationdeflation, the cash , the cash received for the PAR would be received for the PAR would be lessless than the original PAR value than the original PAR value

Upon early redemption, after a Upon early redemption, after a period of period of deflationdeflation, interest , interest received and any received and any premium/discount would be premium/discount would be calculated on a calculated on a deflated PAR deflated PAR valuevalue

Some or even possibly all semi-Some or even possibly all semi-annual interest payments could be annual interest payments could be computed on a computed on a deflated PAR deflated PAR valuevalue

Consumer Price Index (CPI)

TIPS securities are adjusted based on changes in the TIPS securities are adjusted based on changes in the Consumer Price Index-Urban, Non-Seasonally Adjusted Consumer Price Index-Urban, Non-Seasonally Adjusted index CPI-U (NSA), with a 3-month lagindex CPI-U (NSA), with a 3-month lag

The CPI-U is a measure of the average change in prices The CPI-U is a measure of the average change in prices paid by urban consumers for a fixed market basket of paid by urban consumers for a fixed market basket of goods and servicesgoods and services

The CPI is calculated by the Bureau of Labor Statistics The CPI is calculated by the Bureau of Labor Statistics (BLS)(BLS)

BLS changed the CPI precision to three decimal places BLS changed the CPI precision to three decimal places beginning with the January 2007 CPIbeginning with the January 2007 CPI

CPI-U NSA Statistics

Over the last 10 years…

•There has been inflation from one month to the next 80% of the time

•Overall the CPI has increased by 30%

Chart from: www.bls.gov

TIPS Investment/Redemption Rules

Must invest in a TIPS with at least 6 months Must invest in a TIPS with at least 6 months remaining to maturity remaining to maturity

Must be in $1,000 incrementsMust be in $1,000 increments Request must be on Face (par) basis Request must be on Face (par) basis May redeem FIFO or Specific ID inventory May redeem FIFO or Specific ID inventory

methodmethod Request must be received by 3p.m. ESTRequest must be received by 3p.m. EST

Example of TIPS Investment Request in FedInvest

•The Premium, Discount and Accrued Interest are calculated the same as any other Market Based Note/Bond EXCEPT that each is inflated (or deflated) by multiplying by the Index Ratio

•The inflated Par Value at the date of purchase is shown as Inflation Compensation

##X#####

The Index Ratio

• The Index Ratio is used to calculate the TIPS inflated (deflated) value

• The Index Ratio is calculated by dividing the Ref CPI for the date you are valuing by the Ref CPI on the Security’s Dated Date

For example, On Oct. 2, 2006 the Index Ratio = 1.14655 (203.5129/177.5=1.14655)

• The Ref CPI on the Dated Date is also known as the Base CPI and it stays the same throughout the term of the Security

Example Calculation of Purchase Results

Premium = Price-100/100*Principal*Index Ratio(((124.59375-100)/100)*11,500,000,000*1.14655=3,242,765,867.19)

Accrued Interest = Rate/2/days in semi-annual period*days since last interest pay date*Principal*Index Ratio

((.03375/2/183/170)*11,500,000,000*1.14655=206,696,180.72)

Inflation Compensation = (Principal*Index Ratio)-Principal((11,500,000,000*1.14655)-11,500,000,000=1,685,325,000)

Sales Price = Principal-Inflated Discount+Inflated Premium+Inflated Accrued Interest+Inflation Compensation

(11,500,000,000+3,242,765,867.19+206,696,180.84+1,685,325,000=16,634,787,048.03)

Initial Investment Entry (Budgetary entry omitted)

AGENCYAGENCY

1610 1610 Investments in BPD Investments in BPD 13,185,325,000 13,185,325,00016121612 Premium on InvestmentsPremium on Investments 3,242,765,867 3,242,765,86713401340 Interest ReceivableInterest Receivable 206,696,181 206,696,181

1010 1010 Fund Balance with Treasury Fund Balance with Treasury 16,634,787,048 16,634,787,048

BPDBPD

1010 1010 Fund Balance with Treasury 16,634,787,048Fund Balance with Treasury 16,634,787,04863206320 Interest ExpenseInterest Expense 206,696,181 206,696,1812532 2532 Premium on SecuritiesPremium on Securities 3,242,765,867 3,242,765,86725302530 Securities Issued Securities Issued 13,185,325,000 13,185,325,000

Note: Inflation Compensation is added to the Par Value – SGLs 1610 & 2530

Daily Inflation Compensation Daily, the par value of the TIPS is adjusted to its inflated Daily, the par value of the TIPS is adjusted to its inflated

(deflated) value(deflated) value The Daily Inflation Compensation is the change in the The Daily Inflation Compensation is the change in the

inflation adjusted value from the previous day and is inflation adjusted value from the previous day and is calculated using the current day index ratio as follows:calculated using the current day index ratio as follows: Find the current day inflated par value (Original Par value*Current Find the current day inflated par value (Original Par value*Current

day Index Ratio)day Index Ratio) Subtract the current day inflated par value from the previous day Subtract the current day inflated par value from the previous day

inflated par valueinflated par value For our previous example, the Daily Inflation Compensation For our previous example, the Daily Inflation Compensation

for Oct. 3, 2006 is $805,000 for Oct. 3, 2006 is $805,000 (11,500,000,000*1.14662=13,186,130,000)(11,500,000,000*1.14662=13,186,130,000)

(13,186,130,000-13,185,325,000=805,000)(13,186,130,000-13,185,325,000=805,000)

FedInvest Daily Inflation Compensation Report

$805,000.00

##X######X#####

$805,000.00

$2,005,000.00

Daily Inflation Compensation Entry (Budgetary entry omitted)

AGENCYAGENCY

1610 1610 Investments in BPD Investments in BPD 805,000 805,000

5311 5311 Interest RevenueInterest Revenue 805,000 805,000

BPDBPD

6320 6320 Interest Expense Interest Expense 805,000 805,000

2530 2530 Securities IssuedSecurities Issued 805,000 805,000

Impact on FMS SF224

The Daily Inflation Compensation is recorded on the SF 224 as an disbursement to the Subclass 88 Investment principal and a receipt to the Earnings account (either Subclass 76 or .2 Account), therefore the Section II total is $0 (No IPAC)

(76)/.2 ##X####

Weekend/Holiday Inflation Compensation

The Code of Federal Regulations (CFR) states that “If any principal or The Code of Federal Regulations (CFR) states that “If any principal or interest payment date is a Saturday, Sunday, or other day on which the interest payment date is a Saturday, Sunday, or other day on which the Federal Reserve System is not open for business, we will make the Federal Reserve System is not open for business, we will make the payment (without additional interest) on the next business day”payment (without additional interest) on the next business day”

Although Inflation Compensation is not a payment but rather an Although Inflation Compensation is not a payment but rather an adjustment of principal, it is not reported until the next business day adjustment of principal, it is not reported until the next business day for cash basis reporting for cash basis reporting

For month-end accrual basis reporting when month-end falls on a non For month-end accrual basis reporting when month-end falls on a non business day, the Inflation Compensation Adjustment needs to be business day, the Inflation Compensation Adjustment needs to be accrued and therefore recognized as earnings by the Agencies and as accrued and therefore recognized as earnings by the Agencies and as Interest Expense by BPDInterest Expense by BPD

Cash vs Accrual Basis

The month-end for September (and FY06) ended on a non business day

•Agencies & BPD reported Inflation Compensation Adjustments for Saturday 9/30/06 on cash basis reports in October 2006 (SF 224, MTS, DTS)

• BPD did not accrue 9/30/06 inflation adjustments in IRAS or on the Schedule of Federal Debt (BPD system limitation requires the accrual of inflation adjustments as par to be reported to the DTS in September)

• Agencies had trouble accruing the 9/30/06 inflation adjustment as par using SGL 1610 because it would not pass the FACTS II and 2108 edit checks unless they also reported it on the SF 224 in September

• Some agencies reported the 9/30/06 inflation adjustment as interest receivable SGL 1340 instead of par SGL 1610

Elimination Issues

These reporting issues and system limitations caused elimination differences in IFCS & IRAS for the $16 million Inflation Adjustment for 9/30/06:

• BPD reported it as Par in IFCS but not at all in IRAS

• Some Agencies reported it as Par in IFCS & IRAS

• Some Agencies reported it as Interest Receivable in IFCS & IRAS

Solution Beginning with March 2007

When the last day of the month falls on a non-When the last day of the month falls on a non-workday, report the inflation compensation for the workday, report the inflation compensation for the last day(s) of the month as accrued interest. last day(s) of the month as accrued interest.

AGENCYAGENCY

1340 1340 Interest Receivable Interest Receivable 805,000 805,000

5311 5311 Interest RevenueInterest Revenue 805,000 805,000

BPDBPD

6320 6320 Interest Expense Interest Expense 805,000 805,000

2140 2140 Interest PayableInterest Payable 805,000 805,000

March 2007 EOM Reporting

posted as accrued interest posted as accrued interest for accrual reporting for accrual reporting (Schedule of Federal (Schedule of Federal Debt)Debt)

reported in IRAS & reported in IRAS & IFCS as accrued interest IFCS as accrued interest

Not included on 3/30/07 Not included on 3/30/07 DTS or March MTSDTS or March MTS

Not reported on the Not reported on the March SF 224 & GWA March SF 224 & GWA Account Statements Account Statements

Mar 2007

Sun Mon Tue Wed Thu Fri Sat

25 26 27 28 1 2 3

4 5 6 7 8 9 10

11 12 13 14 15 16 17

18 19 20 21 22 23 24

25 26 27 28 29 30 31

1 2 3 4 5 6 7

Entry for the Next Business Day

On the next business day (4/2/07), record the On the next business day (4/2/07), record the Inflation Adjustment (for 3/31/07) as PrincipalInflation Adjustment (for 3/31/07) as Principal

AGENCYAGENCY

16101610 Investments in BPDInvestments in BPD 805,000 805,000

1340 1340 Interest Receivable Interest Receivable 805,000 805,000

BPDBPD

2140 2140 Interest Payable Interest Payable 805,000 805,000

2530 2530 Securities IssuedSecurities Issued 805,000 805,000

April 2007 EOM Reporting

Apr 2007

Sun Mon Tue Wed Thu Fri Sat

25 26 27 28 29 30 31

1 2 3 4 5 6 7

8 9 10 11 12 13 14

15 16 17 18 19 20 21

22 23 24 25 26 27 28

29 30 1 2 3 4 5

The inflation adjustment for The inflation adjustment for 3/31/07 was:3/31/07 was:

Included on 4/02/07 DTS Included on 4/02/07 DTS & April MTS& April MTS

Reported on the April Reported on the April SF 224 & GWA Account SF 224 & GWA Account Statements Statements

Any Questions so far?

So….So….

OUT with the TIPS and…OUT with the TIPS and…

IN with the STRIPS!IN with the STRIPS!

Let’s review, What are Zeros again?

market-based bond w/maturity date = to market-based bond w/maturity date = to marketable STRIPS security.marketable STRIPS security.

No interest paymentsNo interest payments Purchased/Redeemed at a Discount Purchased/Redeemed at a Discount Mature at Par ValueMature at Par Value Maturity date > 5 yearsMaturity date > 5 years MOU requiredMOU required

Why is a MOU required?

Generally it is done to ensure an understanding by Generally it is done to ensure an understanding by the Agency of the potential risks involved with the Agency of the potential risks involved with investing in ZCBs. Longer maturity and lower investing in ZCBs. Longer maturity and lower coupon instruments are more price sensitive to coupon instruments are more price sensitive to interest rate movements. There is a potential for interest rate movements. There is a potential for large losses when they are early redeemed.large losses when they are early redeemed.

Effort to Standardize MOUs

Different MOUs = Different MOUs = Different rulesDifferent rules

FedInvest = need for FedInvest = need for similar rulessimilar rules

Operating Circular Operating Circular provides a basis of provides a basis of defining standard rulesdefining standard rules

ZCB Investment Rules At least 5 years remaining to maturity and same maturity date as a At least 5 years remaining to maturity and same maturity date as a

marketable STRIPSmarketable STRIPS STRIPS component at least $1 Billion outstandingSTRIPS component at least $1 Billion outstanding11

Specify principal or interest STRIPSSpecify principal or interest STRIPS22

Initial investment must result in at least $50 million parInitial investment must result in at least $50 million par Must be in increments of $1 million parMust be in increments of $1 million par33

Limited to 5 requests per business dayLimited to 5 requests per business day May purchase on Available or Face (par) basisMay purchase on Available or Face (par) basis Request must be received by 11:00 am (EST)Request must be received by 11:00 am (EST) Requests are binding once received by BPDRequests are binding once received by BPD

11Currently, this is being reconsidered by TreasuryCurrently, this is being reconsidered by Treasury22 If not specified, one with the lower yield will be used If not specified, one with the lower yield will be used3 3 Investment Fund Operating Circular states $5 million (needs revised)Investment Fund Operating Circular states $5 million (needs revised)

ZCB Redemption Rules

Must not reduce remaining holding less than $50 Must not reduce remaining holding less than $50 million par, if so the entire holding will be redeemedmillion par, if so the entire holding will be redeemed

Must be in increments of $5 million parMust be in increments of $5 million par Limited to 5 requests per business dayLimited to 5 requests per business day Must redeem on Face (par) basisMust redeem on Face (par) basis May redeem FIFO or Specific ID inventory methodMay redeem FIFO or Specific ID inventory method Request must be received by 11:00 am (EST)Request must be received by 11:00 am (EST) Requests are binding once received by BPDRequests are binding once received by BPD

Example of Requests in FedInvest

##X##### Zero Acct##X##### Zero Acct

Request initiates email notification to BPD

##X##### Zero Acct

Zero customer

Email is sent by BPD to the Office of Debt Management (ODM) for pricing

ODM prices ZCB requestat 12:00 noon

Discount rate calculated via a survey of dealer quotes Note: BPD also calculates ZCB pricing in case of contingency

ODM Pricing results sent to BPD by approximately 1:00 p.m.

BPD applies price to transactionBPD applies price to transaction BPD notifies agency of memo #BPD notifies agency of memo # Agency obtains confirmation from Agency obtains confirmation from

FedInvestFedInvest

Confirmation from FedInvest

##X##### Zero Acct

Agency Accounting Guidance

Intent is “Held to Maturity” follow FASAB Intent is “Held to Maturity” follow FASAB Standard 1 - Accounting for Selected Assets and Standard 1 - Accounting for Selected Assets and LiabilitiesLiabilities Carry at acquisition cost less discountCarry at acquisition cost less discount Adjust for amortization using the interest method Adjust for amortization using the interest method Disclose market valueDisclose market value

Intent is “Available for Sale” follow FASB Intent is “Available for Sale” follow FASB Statement 115 - Accounting for Certain Statement 115 - Accounting for Certain Investments in Debt and Equity SecuritiesInvestments in Debt and Equity Securities Carry at market valueCarry at market value Unrealized Gains or Losses Unrealized Gains or Losses

OMB Business Rules for Intragovernmental Fiduciary Transactions

For Zero Coupon Bonds:For Zero Coupon Bonds: BPD & Agencies amortize interest methodBPD & Agencies amortize interest method BPD carry ZCBs at amortized cost with BPD carry ZCBs at amortized cost with

market adjustmentsmarket adjustments Agency with ZCBs available for sale may Agency with ZCBs available for sale may

recognize market adjustments recognize market adjustments

Impact on Debt Subject to Limit•Treasury policy is to score the ZCBs against the debt subject to limit on the Market Value Basis

•The market adjustment and discount amortization are included in the unamortized Discount line of the Daily Treasury Statement (DTS)

“Market value adjustment” vs “Amortization”

BPD only has SGL 2533 (Amortization of Discount and BPD only has SGL 2533 (Amortization of Discount and Premium) to record both the amortization of discount and Premium) to record both the amortization of discount and the market value adjustments of the ZCBsthe market value adjustments of the ZCBs

Therefore, prior to FY 06, BPD did not amortize the Therefore, prior to FY 06, BPD did not amortize the discount of the ZCBs but instead calculated the market discount of the ZCBs but instead calculated the market value adjustment on the cost value instead of amortized value adjustment on the cost value instead of amortized cost valuecost value

Beginning with FY 06, BPD separated the amortization Beginning with FY 06, BPD separated the amortization and market value adjustment calculationsand market value adjustment calculations

Example of BPD change for FY 06

BPD provides Market Value Amounts(Old Method)

BPD provided their Market BPD provided their Market Value Adjustment to the Value Adjustment to the agencies agencies

However, the Agencies However, the Agencies have separate SGL have separate SGL Accounts for Amortization Accounts for Amortization & Market Value & Market Value Adjustments Adjustments

Therefore, the Agency Therefore, the Agency would need to back out would need to back out their amortization from the their amortization from the BPD provided amountBPD provided amount

Old method caused problems with “Held to Maturity” Agency

Agency holding ZCBs to Agency holding ZCBs to maturity carry at maturity carry at Amortized Cost & Disclose Amortized Cost & Disclose Market Value Market Value

They have SGL 1639 as a They have SGL 1639 as a Contra Account for this Contra Account for this purposepurpose

However, They did not However, They did not “back out” their “back out” their amortization from the BPD amortization from the BPD provided amount & instead provided amount & instead recorded entire amount to recorded entire amount to SGL 1638 & 1639SGL 1638 & 1639

Resulted in overstating the Resulted in overstating the Market Value AdjustmentsMarket Value Adjustments

SGL/TFM Guidance needs revised

It seems that the SGL & TFM Guidance for reporting Zero Coupon It seems that the SGL & TFM Guidance for reporting Zero Coupon Bond Investments was based on the Held to Maturity Agency Bond Investments was based on the Held to Maturity Agency reporting only the BPD provided market adjustment on the SF 224 and reporting only the BPD provided market adjustment on the SF 224 and as .931 activity (unamortized discount) on the FMS 2108 as .931 activity (unamortized discount) on the FMS 2108

However, the BPD market adjustment calculated using the old method However, the BPD market adjustment calculated using the old method should be the same as the should be the same as the totaltotal of the agency’s of the agency’s amortizationamortization and and market value adjustmentmarket value adjustment

Therefore, both the amortization and the market value adjustment Therefore, both the amortization and the market value adjustment amounts should be reported on the SF224 as Subclass (72) and on the amounts should be reported on the SF224 as Subclass (72) and on the FMS 2108 as .931 activityFMS 2108 as .931 activity

This problem was discovered when BPD began calculating the market This problem was discovered when BPD began calculating the market adjustment using the new methodadjustment using the new method

FMS is currently working on revising the guidance FMS is currently working on revising the guidance

Entry for initial purchaseAGENCYAGENCY

1630 1630 Investments in ZCBs Investments in ZCBs 340,000,000340,000,0001631 1631 Discount on ZCBs Discount on ZCBs 249,142,048 249,142,0481010 1010 Fund Balance with Treasury Fund Balance with Treasury

90,857,95290,857,952

BPDBPD

1010 1010 Fund Balance with Treasury 90,857,952Fund Balance with Treasury 90,857,9522531 2531 Discount on Securities Issued 249,142,048 Discount on Securities Issued 249,142,048

25302530 Securities Issued Securities Issued 340,000,000 340,000,000

Entry for Amortization(Budgetary entry omitted)

AGENCYAGENCY

1633 1633 Amortization of Discount on ZCBs Amortization of Discount on ZCBs 365,246 365,246

5311 5311 Interest Revenue - Investments Interest Revenue - Investments 365,246 365,246

BPDBPD

63206320 Interest Expense on Securities 368,116Interest Expense on Securities 368,11625332533 Amortization of Discount on Securities Amortization of Discount on Securities

368,116368,116Note: Immaterial Difference of 2,870 due to use of Different Effective Interest Methods of Amortization (BPD uses Scientific Level Yield - Effective Interest Method)

End of Month Market Valuation

BPD provides the Agencies with the EOM Market BPD provides the Agencies with the EOM Market Value of each of their ZCB tax lots in an excel Value of each of their ZCB tax lots in an excel spreadsheet formatspreadsheet format

The Market Value is calculated by BPD using the The Market Value is calculated by BPD using the ZCB pricing formula discussed in previous slide ZCB pricing formula discussed in previous slide with the Discount Rate equal to the prior day bid with the Discount Rate equal to the prior day bid close from Bloomberg Generic pricing sourceclose from Bloomberg Generic pricing source

The BPD calculation is compared against ODM The BPD calculation is compared against ODM spreadsheets for accuracy spreadsheets for accuracy

Example of BPD Spreadsheet provided to Agency

BPD does not provide the amount the agency is required to record as the Market Value Adjustment, however this spreadsheet may be used to calculate it

Agency calculation of EOM market adjustment balance

Step 1: Column I - Add the Amortized Cost Balance (Net amount of SGL 1630, 1631, & 1633)

Step 2: Column J - Add formula to subtract Amortized Cost balance from Tax Lot Market Value. This is the balance that needs to be in the Market Adjustment account (SGL 1638).

Agency calculation of market adjustment entry for current period

Step 3: Column K - Add the prior EOM Market Adjustment balance (SGL 1638 Beginning Balance)

Step 4: Column L - Add formula to subtract Beginning Balance from the Ending Balance. This is the amount required for the current period market adjustment entry.

Entry for Market AdjustmentAvailable for Sale Agency

(Budgetary entry omitted)

AGENCYAGENCY

7280 7280 Unrealized Loss-Investments Unrealized Loss-Investments 4,731,425 4,731,425

1638 1638 Market Adjustment-Investments in ZCBsMarket Adjustment-Investments in ZCBs 4,731,425 4,731,425

BPDBPD

2533 Amortization of Discount 2533 Amortization of Discount 4,734,295 4,734,295 6320 Interest Expense 6320 Interest Expense 4,734,2954,734,295

•Entries would be reversed and 7180 Unrealized Gain used instead of 7280 if the market adjustment is a positive amount

•Note: Same Immaterial Difference of 2,870 between Agency & BPD due to difference in Amortized Cost Value

Entry for Market AdjustmentHeld to Maturity Agency

(Budgetary entry omitted)

AGENCYAGENCY

1639 1639 Contra Market Adjustment-ZCBs Contra Market Adjustment-ZCBs 4,731,425 4,731,425

1638 1638 Market Adjustment-ZCBsMarket Adjustment-ZCBs 4,731,425 4,731,425

BPDBPD

2533 Amortization of Discount 2533 Amortization of Discount 4,734,295 4,734,295 6320 Interest Expense 6320 Interest Expense 4,734,2954,734,295

• Entries would be reversed if the market adjustment is a positive amount

• Note: Same Immaterial Difference of 2,870 between Agency & BPD due to difference in Amortized Cost Value

ZCB Elimination Issues

Large differences exist in the Intragovernmental Fiduciary Large differences exist in the Intragovernmental Fiduciary Confirmation System (IFCS) because the Agency SGLs that include Confirmation System (IFCS) because the Agency SGLs that include the market adjustment amounts are not included, however the SGLs the market adjustment amounts are not included, however the SGLs that BPD uses for market adjustments and amortization are includedthat BPD uses for market adjustments and amortization are included

Large differences exist in the Intragovernmental Reporting and Large differences exist in the Intragovernmental Reporting and Analysis System (IRAS) between BPD and Held to Maturity Agencies Analysis System (IRAS) between BPD and Held to Maturity Agencies because BPD carries ZCBs at Market Value and the Agency carries because BPD carries ZCBs at Market Value and the Agency carries them at Amortized Cost Valuethem at Amortized Cost Value

No overall difference exists in IRAS between BPD and Available for No overall difference exists in IRAS between BPD and Available for Sale agenciesSale agencies

BPD has proposed changes to SGL guidance for ZCB market BPD has proposed changes to SGL guidance for ZCB market adjustment entries to help alleviate elimination issues adjustment entries to help alleviate elimination issues

BPD SGL Proposal

New Liability SGL Account for BPD market New Liability SGL Account for BPD market adjustments (instead of using 2533 Amortization adjustments (instead of using 2533 Amortization of Discount)of Discount)

New Expense SGL Account for BPD market New Expense SGL Account for BPD market adjustments (instead of using 6320 Interest adjustments (instead of using 6320 Interest Expense)Expense)

New Contra-Unrealized Gain/Loss Account for New Contra-Unrealized Gain/Loss Account for Held to Maturity Agency market adjustmentsHeld to Maturity Agency market adjustments

BPD Proposed Entry for Market Adjustment

Available for Sale Agency(Budgetary entry omitted)

AGENCYAGENCY

7280 7280 Unrealized Loss-Investments Unrealized Loss-Investments 4,731,425 4,731,425

1638 1638 Market Adjustment-Investments in ZCBsMarket Adjustment-Investments in ZCBs 4,731,425 4,731,425

BPDBPD

2XXX Market Adjustment-ZCBs 2XXX Market Adjustment-ZCBs 4,734,2954,734,295 632X Market Adjustment Expense-ZCBs 632X Market Adjustment Expense-ZCBs 4,734,2954,734,295

BPD Proposed Entry for Market Adjustment

Held to Maturity Agency(Budgetary entry omitted)

AGENCYAGENCY

1639 1639 Contra Market Adjustment-ZCBs Contra Market Adjustment-ZCBs 4,731,425 4,731,4251638 1638 Market Adjustment-ZCBsMarket Adjustment-ZCBs 4,731,425 4,731,425

BPDBPD

2XXX Market Adjustment-ZCBs 2XXX Market Adjustment-ZCBs 4,734,2954,734,295 632X Market Adjustment Expense-ZCBs 632X Market Adjustment Expense-ZCBs 4,734,2954,734,295

72807280 Unrealized Loss – InvestmentsUnrealized Loss – Investments 4,731,425 4,731,425

7XXX7XXX Contra Unrealized Gain/LossContra Unrealized Gain/Loss 4,731,425 4,731,425

IRAS ReportingAvailable for Sale Agency

NO OVERALL DIFFERENCES

PROPOSED - INDIVIDUAL SGL DIFFERENCES DUE TO AMORTIZATION METHODS

IRAS ReportingHeld to Maturity Agency

PROPOSED - DIFFERENCES DUE TO AMORTIZATION METHODS ARE APPARENT AND OVERALL DIFFERENCES = AMOUNTS IN AGENCY CONTRA ACCOUNTS

Now that the fun is finally over….

Are there any Questions?

For more information….

Contact the Federal Investments Branch at: Contact the Federal Investments Branch at:

304-480-5151304-480-5151

Fedinvestor@bpd.treas.Fedinvestor@bpd.treas.govgov

www.treasurydirect.gov/govt/govt.htmwww.treasurydirect.gov/govt/govt.htm