IRS Proposes Rules for Determining Corporate Bond Yield Curve

The IRS has released a proposed rule aimed at specifying the methodology used to develop the corporate bond yield curve. The corporate bond yield curve is used to derive the interest rates used in calculating present value and making other calculations under a defined benefit plan.

The IRS notes that the methodology is generally the same as contained in Notice 2007-81 but would include two refinements to take into account changes in the bond market since 2007.

  • A hump adjustment variable that peaks at 20 years maturity and serves to capture the effects of the hump in spot rates that is often seen around 20 years maturity.
  • Limiting the exclusion on callable bonds to not apply if the call feature is exercisable only during the last year before maturity.

The proposed regulations would also amend the existing regulations under Internal Revenue Code Section (IRC Sec.) 430(h)(2) to reflect the addition of the interest rate stabilization rules of IRC Sec. 430(h)(2)(C)(iv) and to eliminate transition rules that applied to plan years beginning before January 1, 2010.

The rule proposes applicability for months that begin more than 15 days after the date final regulations are published in the Federal Register. Comments must be received within 60 days of publication of this proposed rule in the Federal Register.