What is a 'Coupon Pass'

A coupon pass is the purchase of treasury notes or bonds from dealers, by the Federal Reserve.

BREAKING DOWN 'Coupon Pass'

 A coupon pass is a commonly used term found in the context of the trading of government securities. The coupon refers to the coupons that are the main difference between T-notes and T-bills, while pass refers to when the Federal Reserve buys T-bills from dealers, thus passing the bill.

The term coupon pass can also be used to refer to the process where primary dealers evaluate the composition and status of their inventory of Treasury securities, for the purpose of deciding whether to buy or sell coupons.

The process that involves a coupon pass generally occurs in the environment of the Federal Reserve System known as the open desk. This is sometimes also known as the open market desk, or open market operation. Whatever name is used, this is the platform where the purchase and sale of securities occur in an open market. This is a fundamental tool the Fed uses to implement and drive monetary policy.

The Federal Reserve Bank of New York oversees and conducts open market operations through its Trading Desk.

Coupon Pass and Government Securities

Coupon pass is a type of transaction that involves the purchase of government securities.

Investors who deal with U.S. government securities, or who are interested in doing so, must understand the important distinctions between the main types of fixed-income securities offered by the federal government to the general public. These securities are Treasury notes, Treasury bonds, and Treasury bills, commonly known as T-notes, T-bonds, and T-bills.

Each of these financial instruments are backed by the federal government, and they are all used as a way for the government to generate funds for both sort-term and long-term needs. But they have some important differences.

  • T-bonds have the longest maturities, offered with a 20-year or 30-year term. This means more price fluctuations but higher interest rates for investors.
  • T-notes have shorter maturities than T-bonds, which also means lower interest rates. Both T-bonds and T-notes are offered with a price that is determined at auction. The two also have similar interest payment schedules.
  • T-bills have short maturity periods of one year or less. They offer the lowest interest rates. They are auctioned to buyers at a discount price. Investors view their profit or interest payment as the difference between this discounted price and par value, or the face value of the bond.
RELATED TERMS
  1. Coupon Rate

    Coupon rate is the yield paid by a fixed income security, which ...
  2. Coupon Bond

    A coupon bond is a debt obligation with coupons attached that ...
  3. Current Coupon

    A current coupon refers to a security that is trading closest ...
  4. Treasury Yield

    Treasury yield is the return on investment, expressed as a percentage, ...
  5. Gross Coupon

    A gross coupon is the annual interest rate received from a mortgage-backed ...
  6. Federally Guaranteed Obligations

    Federally guaranteed obligations are debt securities issued by ...
Related Articles
  1. Personal Finance

    6 Tricks To Make Coupons Work For You

    Use these strategies to counteract the stores' and manufacturers' coupon tactics and come out ahead.
  2. Personal Finance

    Couponing 101: Dos and Don'ts

    Coupon clipping isn't new, but it has gone digital. Find out how to use coupons to your advantage today.
  3. Personal Finance

    Is Coupon Clipping A Waste Of Time?

    Coupons reduce the cost of a product or service, but are the savings really worth the time it takes?
  4. Investing

    The Basics Of The T-Bill

    The U.S. government has two primary methods of raising capital. One is by taxing individuals, businesses, trusts and estates; and the other is by issuing fixed-income securities that are backed ...
  5. Financial Advisor

    Calculate PV of different bond type with Excel

    To determine the value of a bond today — for a fixed principal (par value) to be repaid in the future — we can use an Excel spreadsheet.
  6. Investing

    Corporate Bonds: Advantages and Disadvantages

    Corporate bonds can provide compelling returns, even in low-yield environments. But they are not without risk.
  7. Financial Advisor

    Top 4 Treasurys ETFs (SHY, IEI)

    Learn about the specifics of the top four U.S. Treasury ETFs and how investors can buy ETFs that invest in bonds along the yield curve.
  8. Investing

    The 3 Largest U.S. Government ETFs (TIP, SHY)

    Learn about the benefits of U.S. government ETFs, and explore the three largest government funds available on the market as of March 2016.
RELATED FAQS
  1. What is the most common solvency ratios used in fundamental analysis?

    Learn about the difference between a bond's coupon rate and its yield rate, how the coupon rate influences market price and ... Read Answer >>
  2. When is a bond's coupon rate and yield to maturity the same?

    Find out when a bond's yield to maturity is equal to its coupon rate, and learn about the components of bonds and how they ... Read Answer >>
  3. How can I calculate a bond's coupon rate in Excel?

    Find out how to use Microsoft Excel to calculate the coupon rate of a bond using its par value and the amount and frequency ... Read Answer >>
  4. Is a treasury bond a good investment for retirement?

    Understand why Treasury bonds (T-bonds) are a popular choice for investors near retirement and why they are not always suitable ... Read Answer >>
  5. How are treasury bills (T-bills) taxed?

    Lear how the Internal Revenue Service collects taxes on treasury bills (T-bills) purchased from the United States government ... Read Answer >>
Trading Center