- 106 -
than par for them, since all the increase in the value of the
notes would only be appropriated by Merrill. It appears from the
BOT and BFCE documents that the terms for Merrill's call option
had already been worked out, along with most of the other details
of the transaction structure, within 1 week of ACM's acquisition
of the Citicorp Notes. Thus, Merrill designed the Citicorp Note
transactions in a manner that effectively left no opportunity for
ACM, or Colgate, to benefit from an improvement in Citicorp's
credit. We reject petitioner's first contention.
Turning to petitioner's second claim that the Citicorp
Notes, as floating rate notes (FRN's), could increase in value by
way of an increase in the related commercial paper rate, we note
that the value of a FRN is generally invariant to changes in
market interest rates. Indeed, this is the source of its appeal
to investors. Because the coupon payable on the Citicorp Notes
was reset each month at the current commercial paper rate, the
value of the notes should not have deviated significantly from
par. This appears to have been the understanding of those who
planned and approved the Citicorp Note investment. A memorandum
of ACM's accountants recites that "[a]s per explanation of
Mr. Hans Pohlschroeder * * * the Citicorp Notes were floating
rate notes * * * and can thus by definition not fluctuate in
value because of changes in interest rates as the interest on the
notes follows these changes". Under the partnership's Accounting
Page: Previous 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 NextLast modified: May 25, 2011