DEFINITION of Certificate of Indebtedness
A certificate of indebtedness is a short-term coupon-bearing security once issued by the United States Treasury. 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.
In 1934, the U.S. government suspended the sale of such certificates and replaced them with short-term Treasury bills (T-bills), which were introduced at the onset of the Great Depression.
BREAKING DOWN Certificate of Indebtedness
To ease fluctuations in government balances at the Federal Reserve banks, the U.S. Treasury raised money in smaller amounts – several hundred million dollars at a time – by issuing certificates of indebtedness that could be used later to satisfy tax liabilities or to fund bond subscription payments. 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 his or her certificate would go back to the bank where s/he bought them and ask the bank to repurchase the securities. 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 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.
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 unpledged assets of the issuer.