Certificate of Indebtedness

What Was a Certificate of Indebtedness?

Certificates of indebtedness were short-term coupon-bearing government securities once issued by the U.S. Treasury, which were supplanted by Treasury bills (T-bills) in 1934.

A certificate of indebtedness was something of an "IOU" from the U.S. government, promising certificate holders a return of their funds with a fixed coupon, similar as some other type of U.S. Treasury security.

Understanding Certificates of Indebtedness

To ease fluctuations in government balances at the Federal Reserve banks, the U.S. Treasury fund-raised in more modest amounts — a few hundred million dollars at a time — by giving certificates of indebtedness that could be utilized later to satisfy tax liabilities or to fund bond subscription payments.

Certificates of indebtedness were first introduced around the Civil War. The Act of March 1, 1862, considered the creation of certificates that paid 6% interest, were something like $1,000, and payable in a year or less. These were called "Treasury Notes" but too "certificates of indebtedness" to mark the difference between these and demand notes. Later, certificates of indebtedness were issued during the Panic of 1907, in $50 denominations. These filled in as backing for the rise in banknotes in circulation.

The short-term certificates were utilized to finance World War I and were issued monthly, and sometimes, bi-weekly. Treasury authorities set the coupon rate on another issue and afterward offered it to investors at a price of par. An investor who wanted to liquidate their certificate would return to the bank where they bought them and ask the bank to repurchase the securities.

Certificates of indebtedness were utilized to bridge periods of budget gaps, including the financing of World War I.

Special Considerations

In modern terms, a certificate of indebtedness is generally used to allude to a written guarantee to repay debt. Fixed income securities, for example, certificates of deposit (CDs), promissory notes, bond certificates, floaters, etc. are completely alluded to as certificates of indebtedness as they are forms of obligation issued by a government or corporate entity, giving the holder a claim to the un-swore assets of the issuer.

Certificates of Indebtedness versus T-Bills

At the point when Treasury authorities expanded Treasury bill issuance in 1934, they simultaneously stopped offering certificates of indebtedness. Toward the finish of 1934, T-bills were the short-term instruments of Treasury debt management. Not at all like Treasury bills, which are sold at a discount and mature at par value without a coupon payment, certificates of indebtedness offered fixed coupon payments. Certificates of indebtedness typically matured in one year or less, similar as the T-bills and notes that succeeded the now-defunct certificates.

There are still zero-percent certificates of indebtedness, which are non-interest-bearing securities. These securities have a one-day maturity and are automatically turned over until redemption is requested. These securities fill one need: They are meant to act as a method for building funds to purchase another security from the Treasury.

Highlights

• Certificates of Indebtedness went before T-Bills, acting as "IOUs" issued by the U.S. government.
• Certificates were sold at par and paid fixed coupons, while T-Bills are sold at a discount to par, and return par value to investors.
• CDs, bond certificates, promissory notes, etc. are modern forms of certificates of indebtedness.
• Investors in the certificates could return to the bank where it was purchased and liquidate the securities for cash.