Appendix B to Part 344-
This results in a premium or discount to the government body, 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.
A. The total redemption value for bonds and notes can be determined by the
following two steps:
First, accrued interest payable in accordance with
Sec. 344.5(a)(3)(i) is calculated using the following formula:
[See Mun-Ease documentation]
where
RV=Redemption value
F=Face amount redeemed
AI=Accrued interest=[(s-r)/s] x (C/2)
r=Number of days from redemption date to next interest payment date
s=number of days in current semi-annual period
i=Treasury borrowing rate over the remaining term to maturity, based on
semi-annual interest payments and expressed in decimals
C=the regular annual interest
n=number of remaining full semi-annual periods from the redemption date
to the original maturity date, except that, if the redemption date is
an interest payment date, n will be one less than the number of full
semi-annual periods remaining to maturity
v<SUP>n=1/(1+i/2) <SUP>n=present value of 1 due at the end of n periods
a<INF>a=(1-v<SUP>n)/(i/2)=v + v<SUP>2 + v<SUP>3 + ... + v<SUP>n =
present value of 1 per period for n periods
B. The application of this formula can be illustrated by the following
examples:
(i) The first example is for a redemption at a premium.
(1) 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.
(2) 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%.
(3) The redemption value is computed as follows:
First, the accrued interest payable is calculated as:
[See Mun-Ease documentation]
(ii) 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%:
(1) 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.
(2) 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%.
(3) The redemption value is computed as follows. First, the accrued interest
payable is calculated as:
[See Mun-Ease documentation]
C. The total redemption value for certificates can be determined by the
following two steps:
First, accrued interest payable in accordance with Section 344.5(a)(3)(i) is
calculated using the following formula:
[See Mun-Ease documentation]
where:
RV=Redemption value
F=Face amount redeemed
AI=Accrued interest = [(d-r)/y] x C
d=Number of days from original issue of the certificate to its maturity date
r=Number of days from redemption date to the certificate's maturity date
y=365, if the number of days in the year following issue of the certificate
does not include a leap year day; 366, if the number of days following issue of
the certificate does include a leap year day
i=Treasury borrowing rate over the remaining term to maturity, expressed in
decimals
C=the regular annual interest
D. The application of this formula can be illustrated by the following
examples.
(i) First, for a redemption at a premium:
(1) 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.
(2) 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%.
(3) The redemption value is computed as follows. First, the accrued interest
payable is calculated as:
[See Mun-Ease documentation]
(ii) Secondly, for a redemption at a discount:
(1) 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.
(2) 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%.
(3) The redemption value is computed as follows. First, the accrued interest
payable is calculated as:
[See Mun-Ease documentation]