us treasury: tips&zcbrevised

8/14/2019 US Treasury: TIPS&ZCBRevised

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Treasury Inflation Protected

Securities

and

Zero 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 protectmirror-image market-based note or bond designed to protect

investors from inflationinvestors from inflation

principal of a TIPS increases with inflation and decreases with principal of a TIPS increases with inflation and decreases withdeflation, 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 tohas a stated rate of interest payable semiannually that is applied to

the inflation-adjusted principalthe inflation-adjusted principal

purchased or redeemed at inflation-adjusted premium or discount purchased 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 originalmatures 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 thatmarket-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 discountPurchased 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 RegisteredInterest and Principal of Securities. A STRIPS security is aInterest 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 Noteor Bond that has been stripped off and can be held or tradedor Bond that has been stripped off and can be held or tradedseparately in the secondary market. STRIPS are not issuedseparately 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 byZCB securities may only be purchased by

an agency that has entered into a writtenan agency that has entered into a writtenmemorandum of understanding (MOU)memorandum of understanding (MOU)with Treasurywith 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, onlyHowever, only twotwo of these agencies holdof these agencies holdZCB 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 encounteredreturn 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 TIPSOn a daily basis, the Investor’s principal of the TIPS

security is adjusted for inflationsecurity is adjusted for inflation

When interest is paid to the Investor it is calculated on theWhen interest is paid to the Investor it is calculated on the

inflated principal valueinflated principal value

Therefore, as long as inflation increases, the Investor’sTherefore, as long as inflation increases, the Investor’s

Interest Revenue increasesInterest Revenue increases



Things to consider…PROSPROS

Upon early redemption, after aUpon early redemption, after a period of period of inflationinflation, the cash, the cashreceived for the PAR would bereceived for the PAR would be greater greater than the original PAR than the original PAR valuevalue

Upon early redemption, after aUpon early redemption, after a

period of period of inflationinflation, interest, interestreceived and anyreceived and any premium/discount would be premium/discount would becalculated on ancalculated on an inflated PARinflated 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 PARinflated PAR

valuevalue

If held to maturityIf held to maturity, the cash, the cashreceived for PAR will never bereceived for PAR will never be

less than the original PAR evenless than the original PAR evenin deflationin deflation

CONSCONS

Upon early redemption, after aUpon early redemption, after a period of period of deflationdeflation, the cash, the cash

received for the PAR would bereceived for the PAR would be

lessless than the original PAR valuethan the original PAR value

Upon early redemption, after aUpon early redemption, after a

period of period of deflationdeflation, interest, interestreceived and anyreceived and any

premium/discount would be premium/discount would be

calculated on acalculated on a deflated PARdeflated PAR

valuevalue

Some or even possibly all semi-Some or even possibly all semi-annual interest payments could beannual interest payments could be

computed on acomputed on a deflated PARdeflated PAR

valuevalue



Consumer Price Index (CPI)

TIPS securities are adjusted based on changes in theTIPS securities are adjusted based on changes in the

Consumer Price Index-Urban, Non-Seasonally AdjustedConsumer Price Index-Urban, Non-Seasonally Adjustedindex 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 pricesThe 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 StatisticsThe CPI is calculated by the Bureau of Labor Statistics(BLS)(BLS)

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



CPI-U NSA Statistics

Over the last 10 years…

•There has been

inflation from onemonth 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 monthsMust invest in a TIPS with at least 6 months

remaining to maturityremaining to maturity

Must be in $1,000 incrementsMust be in $1,000 increments Request must be on Face (par) basisRequest must be on Face (par) basis

May redeem FIFO or Specific ID inventoryMay redeem FIFO or Specific ID inventory

methodmethod

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



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 ResultsPremium = 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)

AGENCY

1610 Investments in BPD 13,185,325,000

1612 Premium on Investments 3,242,765,867

1340 Interest Receivable 206,696,181

1010 Fund Balance with Treasury16,634,787,048

BPDBPD

10101010 Fund Balance with Treasury 16,634,787,048Fund Balance with Treasury 16,634,787,048

63206320 Interest ExpenseInterest Expense 206,696,181206,696,18125322532 Premium on SecuritiesPremium on Securities 3,242,765,8673,242,765,867

25302530 Securities IssuedSecurities Issued 13,185,325,00013,185,325,000

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 inflatedDaily, the par value of the TIPS is adjusted to its inflated(deflated) value(deflated) value

The Daily Inflation Compensation is the change in theThe Daily Inflation Compensation is the change in theinflation adjusted value from the previous day and isinflation 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*CurrentFind 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 daySubtract the current day inflated par value from the previous day

inflated par valueinflated par value

For our previous example, the Daily Inflation CompensationFor our previous example, the Daily Inflation Compensationfor Oct. 3, 2006 is $805,000for 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)

AGENCY

1610 Investments in BPD 805,000

5311 Interest Revenue 805,000

BPD

6320 Interest Expense 805,000

2530 Securities Issued 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 theinterest payment date is a Saturday, Sunday, or other day on which the

Federal Reserve System is not open for business, we will make theFederal 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 anAlthough Inflation Compensation is not a payment but rather an

adjustment of principal, it is not reported until the next business dayadjustment of principal, it is not reported until the next business day

for cash basis reportingfor cash basis reporting

For month-end accrual basis reporting when month-end falls on a nonFor 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 asaccrued 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 atall 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 theworkday, report the inflation compensation for the

last day(s) of the month as accrued interest.last day(s) of the month as accrued interest.

AGENCY

1340 Interest Receivable 805,000

5311 Interest Revenue 805,000

BPD

6320 Interest Expense 805,000

2140 Interest Payable 805,000



March 2007 EOM Reporting

posted as accrued interest posted as accrued interestfor accrual reportingfor accrual reporting

(Schedule of Federal(Schedule of FederalDebt)Debt)

reported in IRAS & IFCSreported in IRAS & IFCSas accrued interestas 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 & GWAMarch SF 224 & GWAAccount StatementsAccount 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 theOn the next business day (4/2/07), record the

Inflation Adjustment (for 3/31/07) as PrincipalInflation Adjustment (for 3/31/07) as Principal

AGENCY

1610 Investments in BPD 805,000

1340 Interest Receivable 805,000

BPD

2140 Interest Payable 805,000

2530 Securities Issued 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 DTSIncluded on 4/02/07 DTS

& April MTS& April MTS

Reported on the AprilReported on the April

SF 224 & GWA AccountSF 224 & GWA Account

StatementsStatements



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 = tomarket-based bond w/maturity date = to

marketable STRIPS security.marketable STRIPS security. No interest payments No interest payments

Purchased/Redeemed at a DiscountPurchased/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 byGenerally it is done to ensure an understanding by

the Agency of the potential risks involved withthe Agency of the potential risks involved withinvesting in ZCBs. Longer maturity and lower investing in ZCBs. Longer maturity and lower

coupon instruments are more price sensitive tocoupon 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 aAt least 5 years remaining to maturity and same maturity date as amarketable 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 par Initial investment must result in at least $50 million par Must be in increments of $1 million par Must be in increments of $1 million par 33

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 usedIf not specified, one with the lower yield will be used33 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 $50Must 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 par Must 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 request

at 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 fromAgency obtains confirmation from

FedInvestFedInvest



Confirmation from FedInvest

##X##### Zero Acct



Agency Accounting Guidance

Intent is “Held to Maturity” follow FASABIntent is “Held to Maturity” follow FASABStandard 1 - Accounting for Selected Assets andStandard 1 - Accounting for Selected Assets andLiabilitiesLiabilities Carry at acquisition cost less discountCarry at acquisition cost less discount Adjust for amortization using the interest methodAdjust for amortization using the interest method Disclose market valueDisclose market value

Intent is “Available for Sale” follow FASBIntent is “Available for Sale” follow FASB

Statement 115 - Accounting for CertainStatement 115 - Accounting for CertainInvestments in Debt and Equity SecuritiesInvestments in Debt and Equity Securities Carry at market valueCarry at market value Unrealized Gains or LossesUnrealized Gains or Losses



OMB Business Rules for

Intragovernmental Fiduciary TransactionsFor Zero Coupon Bonds:For Zero Coupon Bonds:

BPD & Agencies amortize interest methodBPD & Agencies amortize interest method

BPD carry ZCBs at amortized cost withBPD carry ZCBs at amortized cost with

market adjustmentsmarket adjustments

Agency with ZCBs available for sale mayAgency with ZCBs available for sale may

recognize market adjustmentsrecognize 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 theunamortized Discount line

of the Daily Treasury

Statement (DTS)



“Market value adjustment” vs

“Amortization” BPD only has SGL 2533 (Amortization of Discount andBPD only has SGL 2533 (Amortization of Discount and

Premium) to record both the amortization of discount andPremium) 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 theTherefore, prior to FY 06, BPD did not amortize the

discount of the ZCBs but instead calculated the marketdiscount of the ZCBs but instead calculated the market

value adjustment on the cost value instead of amortizedvalue adjustment on the cost value instead of amortized

cost valuecost value

Beginning with FY 06, BPD separated the amortizationBeginning 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 MarketBPD provided their Market

Value Adjustment to theValue Adjustment to the

agenciesagencies

However, the AgenciesHowever, the Agencieshave separate SGLhave separate SGL

Accounts for AmortizationAccounts for Amortization

& Market Value& Market Value

AdjustmentsAdjustments

Therefore, the AgencyTherefore, the Agency

would need to back outwould need to back out

their amortization from thetheir amortization from the

BPD provided amountBPD provided amount



Old method caused problems with

“Held to Maturity” Agency Agency holding ZCBs toAgency holding ZCBs to

maturity carry atmaturity carry atAmortized Cost & DiscloseAmortized Cost & DiscloseMarket ValueMarket Value

They have SGL 1639 as aThey have SGL 1639 as aContra Account for thisContra Account for this purpose purpose

However, They did notHowever, They did not“back out” their “back out” their

amortization from the BPDamortization from the BPD provided amount & instead provided amount & insteadrecorded entire amount torecorded entire amount toSGL 1638 & 1639SGL 1638 & 1639

Resulted in overstating theResulted in overstating theMarket Value AdjustmentsMarket Value Adjustments



SGL/TFM Guidance needs revised

It seems that the SGL & TFM Guidance for reporting Zero CouponIt seems that the SGL & TFM Guidance for reporting Zero Coupon

Bond Investments was based on the Held to Maturity AgencyBond Investments was based on the Held to Maturity Agency

reporting only the BPD provided market adjustment on the SF 224 andreporting only the BPD provided market adjustment on the SF 224 and

as .931 activity (unamortized discount) on the FMS 2108as .931 activity (unamortized discount) on the FMS 2108

However, the BPD market adjustment calculated using the old methodHowever, the BPD market adjustment calculated using the old methodshould be the same as theshould be the same as the totaltotal of the agency’sof the agency’s amortizationamortization andand

market value adjustmentmarket value adjustment

Therefore, both the amortization and the market value adjustmentTherefore, both the amortization and the market value adjustment

amounts should be reported on the SF224 as Subclass (72) and on theamounts 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 marketThis 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 guidanceFMS is currently working on revising the guidance



Entry for initial purchase

AGENCYAGENCY

16301630 Investments in ZCBsInvestments in ZCBs 340,000,000340,000,000

16311631 Discount on ZCBsDiscount on ZCBs

249,142,048249,142,04810101010 Fund Balance with TreasuryFund Balance with Treasury

90,857,95290,857,952

BPDBPD

10101010 Fund Balance with Treasury 90,857,952Fund Balance with Treasury 90,857,952

25312531 Discount on Securities Issued 249,142,048Discount on Securities Issued 249,142,048

25302530 Securities IssuedSecurities Issued 340,000,000340,000,000



Entry for Amortization

(Budgetary entry omitted)AGENCYAGENCY

16331633 Amortization of Discount on ZCBsAmortization of Discount on ZCBs 365,246365,246

53115311 Interest Revenue - InvestmentsInterest Revenue - Investments

365,246365,246 BPDBPD

63206320 Interest Expense on Securities 368,116Interest Expense on Securities 368,116

25332533 Amortization of Discount on SecuritiesAmortization of Discount on Securities 368,116368,116

Note: 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 MarketBPD provides the Agencies with the EOM Market

Value of each of their ZCB tax lots in an excelValue of each of their ZCB tax lots in an excel

spreadsheet formatspreadsheet format

The Market Value is calculated by BPD using theThe Market Value is calculated by BPD using the

ZCB pricing formula discussed in previous slideZCB pricing formula discussed in previous slide

with the Discount Rate equal to the prior day bidwith 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 ODMThe BPD calculation is compared against ODM

spreadsheets for accuracyspreadsheets 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.

E t f M k t Adj t t



Entry for Market Adjustment

Available for Sale Agency(Budgetary entry omitted)

AGENCYAGENCY

72807280 Unrealized Loss-InvestmentsUnrealized Loss-Investments 4,731,4254,731,425

16381638 Market Adjustment-Investments in ZCBsMarket Adjustment-Investments in ZCBs 4,731,4254,731,425 BPDBPD

2533 Amortization of Discount2533 Amortization of Discount 4,734,2954,734,295

6320 Interest Expense6320 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

E t f M k t Adj t t



Entry for Market Adjustment

Held to Maturity Agency(Budgetary entry omitted)

AGENCYAGENCY

16391639 Contra Market Adjustment-ZCBsContra Market Adjustment-ZCBs 4,731,4254,731,425

16381638 Market Adjustment-ZCBsMarket Adjustment-ZCBs 4,731,4254,731,425 BPDBPD

2533 Amortization of Discount2533 Amortization of Discount 4,734,2954,734,295

6320 Interest Expense6320 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 FiduciaryLarge differences exist in the Intragovernmental Fiduciary

Confirmation System (IFCS) because the Agency SGLs that includeConfirmation System (IFCS) because the Agency SGLs that include

the market adjustment amounts are not included, however the SGLsthe 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 andLarge differences exist in the Intragovernmental Reporting and

Analysis System (IRAS) between BPD and Held to Maturity AgenciesAnalysis 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 marketBPD has proposed changes to SGL guidance for ZCB market

adjustment entries to help alleviate elimination issuesadjustment entries to help alleviate elimination issues



BPD SGL Proposal

New Liability SGL Account for BPD market New Liability SGL Account for BPD marketadjustments (instead of using 2533 Amortizationadjustments (instead of using 2533 Amortizationof Discount)of Discount)

New Expense SGL Account for BPD market New Expense SGL Account for BPD marketadjustments (instead of using 6320 Interestadjustments (instead of using 6320 InterestExpense)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

72807280 Unrealized Loss-InvestmentsUnrealized Loss-Investments 4,731,4254,731,425

16381638 Market Adjustment-Investments in ZCBsMarket Adjustment-Investments in ZCBs 4,731,4254,731,425

BPDBPD

2XXX Market Adjustment-ZCBs2XXX Market Adjustment-ZCBs 4,734,2954,734,295632X Market Adjustment Expense-ZCBs632X Market Adjustment Expense-ZCBs 4,734,2954,734,295





Adjustment

Held to Maturity Agency(Budgetary entry omitted)

AGENCYAGENCY

16391639 Contra Market Adjustment-ZCBsContra Market Adjustment-ZCBs 4,731,4254,731,42516381638 Market Adjustment-ZCBsMarket Adjustment-ZCBs 4,731,4254,731,425

BPDBPD

2XXX Market Adjustment-ZCBs2XXX Market Adjustment-ZCBs 4,734,2954,734,295

632X Market Adjustment Expense-ZCBs632X Market Adjustment Expense-ZCBs 4,734,2954,734,295

72807280 Unrealized Loss – InvestmentsUnrealized Loss – Investments 4,731,4254,731,425

7XXX7XXX Contra Unrealized Gain/LossContra Unrealized Gain/Loss 4,731,4254,731,425

IRAS Reporting



IRAS Reporting

Available for Sale Agency

NO OVERALL DIFFERENCES

PROPOSED - INDIVIDUAL SGL DIFFERENCES DUE TO AMORTIZATION METHODS

IRAS Reporting



p g

Held to Maturity Agency

PROPOSED - DIFFERENCES DUE TO AMORTIZATION METHODS ARE APPARENT

AND OVERALL DIFFERENCES = AMOUNTS IN AGENCY CONTRA ACCOUNTS



Now that the fun is finallyover….

Are there any Questions?



For more information….

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

304-480-5151304-480-5151

[email protected]@bpd.treas.govgov

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

mailto:[email protected]






us treasury: tips&zcbrevised

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