This Office has received a number of inquiries regarding the determination of the value of zero coupon securities for purposes of determining the bank's investment limitation under Wis. Stat. s. 221.29(2). The general investment limitation in securities issued by a municipality is an amount equal to 25% of the bank's capital and surplus. However, if the securities are issued by a governmental entity located in Wisconsin that amount increases to 50% of the bank's capital and surplus. The investment limitations for corporate securities is 20% of capital stock and surplus, or 15% of capital and surplus.

Zero coupon securities include original Issue Discount Municipal Bonds, Stripped Coupon Securities and Treasury Receipts. Original issue discount securities have no interest coupons and are issued for relatively long terms. Stripped coupon securities refers to securities which have been altered by removing the interest coupons so that the altered security or the coupons may be sold separately. Treasury receipts represent future interest in principal or interest payments on U.S. Treasury securities. Generally, these securities are available at substantial discounts and are marketed by brokerage firms under s​uch acronyms as CATS, TIGRS, etc. These securities are subject to considerable price volatility and are extremely sensitive to fluctuations in interest rates.

As with any other security, this Office will apply the investment limitations of Wis. Stat. s. 221.29(2)​ to the par value, and not to the purchase price, of these securities. Investment limitations are based upon the liability of the issuer which is reflected in the actual par value rather than in the purchase price of these securities.

The reporting of zero coupon bonds must take account of their extreme price volatility. It is inappropriate, for example, in the case of original issue discount securities for the bank to accrete the security on a level yield basis and report that value when that amount is substantially above market value. With respect to any of these securities in a bank's portfolio with a maturity of more than five years, the value of the asset for reporting purposes will be marked to its current market value as of December 31 of each year.

If the bank is presently in an overline position on zero coupon bonds, the board of directors should develop a plan for the elimination of that overline by December 31, 1987. A resolution establishing that plan should be included in the minutes of the board.


Banking Letter 43, December 30, 1985, Commissioner Galecki