Applicable Federal Rate Information

L1: Applicable Federal Rate InformationApplicable federal rates are published once per month by the IRS in a revenue ruling (which can also be found in the weekly Cumulative Bulletin). Obviously, we all are most interested in 120% of the mid-term rate representing the ceiling rate to be used for IRC 72(t)(2)(A)(iv) computations.
Well, it turns out that the IRS is a copycat. They don’t develop the rates (it took me three days of phone calls to figure this out). Instead, they wait for a statistician over at the U.S. Treasury to do all the foot work & he ships a table over to the IRS. I finally talked to THE MAN at Treasury and he was kind enough to explain to me how AFRs are computed. He does it through the compilation of daily U.S. Treasury yields which are published at http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/yield.html. AFRs are computed from the 15th of the month to the 14th of month. As a result, the May, 2004 rate is computed using data points from March 15th through April 14th.
In the case of the mid-term rate; the 3, 5, 7 & 10 year weighted rates are used & a composite average yield curve is created. Then they statistically average the single average yield curve for the month to get a single point called the mid-term applicable federal rate. I am unable to precisely duplicate their statistical models but with 30 minutes of work I was able to back-test February, 2004 through May, 2004 and was always within 4 basis points.
In summary, after talking with the statistician, I am finally satisfied that: one, I know how AFRs are computed; two, they are computed fairly & correctly; three, I can model future results. As an example, the sampling days for the June rates are not done (we have to wait until May 14th); however, if we ASSUME no change in rates for the next two weeks; the June mid-term AFR will be 3.70; therefore 120% will be 4.44%; 63 basis points higher than May. As a test, let’s see how close I come.
TheBadgerwjstecker@wispertel.net2004-04-30 14:37, By: TheBadger, IP: [66.250.23.21]

L2: Applicable Federal Rate InformationFirst, many thanks to “the Badger” for his help. Starting with his post above and a few emails, we have added a new page to the site titled “Estimated Mid-Term” that can be found at http://72t.net/EstAfrRates.aspx
The calculations start on the 15th of the previous month and are updated on a daily basis – at least as soon as the IRS publishes their daily rate. For each month, the calculations stop on the 14th and the results will be posted through the end of the month when it starts over.
I’m sure that I’ll be making a few adjustments with time and please remember, it is only an estimate and will in all probability be either HIGH or LOW.2004-05-04 14:58, By: Gfw, IP: [172.16.1.71]