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Certificate of Indebtedness Definition
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Bonds Fixed Income Essentials

Certificate of Indebtedness

By
Adam Hayes
Full Bio
Adam Hayes is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7 & 63 licenses. He currently researches and teaches at the Hebrew University in Jerusalem.
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Updated September 02, 2021
Fixed Income Essentials
  • Guide to Fixed Income

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 replaced 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, much like any other type of U.S. Treasury security.

Key Takeaways

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

Understanding Certificates of Indebtedness

To ease fluctuations in government balances at the Federal Reserve banks, the U.S. Treasury raised money in smaller amountsseveral hundred million dollars at a timeby issuing certificates of indebtedness that could be used 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, allowed for the creation of certificates that paid 6% interest, were no less than $1,000, and payable in a year or less. These were called "Treasury Notes" but also "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 served as backing for the rise in banknotes in circulation.

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

Certificates of indebtedness were used 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 refer to a written promise to repay debt. Fixed income securities such as certificates of deposit [CDs], promissory notes, bond certificates, floaters, etc. are all referred 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-pledged assets of the issuer.

Certificates of Indebtedness vs. T-Bills

When Treasury officials expanded Treasury bill issuance in 1934, they simultaneously stopped offering certificates of indebtedness. By the end of 1934, T-bills were the short-term instruments of Treasury debt management. Unlike 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, much like 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 rolled over until redemption is requested. These securities serve one purpose: They are meant to serve as a way to build funds in order to purchase another security from the Treasury.

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Related Terms

Treasury Bills [T-Bills]
A Treasury Bill [T-Bill] is a short-term debt obligation issued by the U.S. Treasury and backed by the U.S. government with a maturity of less than one year.
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What Is a 10-Year Treasury Note?
A 10-year Treasury note is a debt obligation issued by the United States government that matures in 10 years.
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Federally Guaranteed Obligations
Federally guaranteed obligations are debt securities issued by the United States government that are considered risk-free.
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Treasury Yield
The Treasury yield is the interest rate that the U.S. government pays to borrow money for different lengths of time.
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Short-Term Paper
Short-term papers are financial instruments that typically have original maturities of less than nine months.
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The Benefits and Risks of Fixed Income Products
Fixed income refers to assets and securities that bear fixed cash flows for investors, such as fixed rate interest or dividends.
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