[Code of Federal Regulations]
[Title 31, Volume 2]
[Revised as of July 1, 2008]
From the U.S. Government Printing Office via GPO Access
[CITE: 31CFR356 App C]

[Page 403-404]

                  TITLE 31--MONEY AND FINANCE: TREASURY

         CHAPTER II--FISCAL SERVICE, DEPARTMENT OF THE TREASURY

PART 356_SALE AND ISSUE OF MARKETABLE BOOK-ENTRY TREASURY BILLS, NOTES, AND

                   Subpart D_Miscellaneous Provisions

         Sec. 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 fixed-principal 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 Sec. 356.30.)

[[Page 404]]

                   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 fixed-principal securities. In addition, Treasury
inflation-protected securities may not be as widely traded or as well
understood as Treasury fixed-principal 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 fixed-principal 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.