What is a 'Coupon Pass'

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


 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.
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