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Why Use Zero-Percent Certificates of Indebtedness?

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When I opened a Treasury Direct account, the only email in my Investor’s Inbox told me about Zero-Percent Certificates of Indebtedness (C-of-I’s). A Zero-Percent Certificate of Indebtedness is a Treasury Security that earns absolutely no interest. The point of it is to act as a source of funds to buy other securities with. I don’t see why it even exists when you can fund Treasury purchases from a bank account that’s earning around 4% interest while you decide what to buy! They tout that the benefits include being able to send payroll deductions, regular electronic deposits from your bank, or other financial sources – but that’s what I’d do with a regular bank anyway. It just sounds like the 0% interest single-day maturity certificate is just a fancy name for “non-interest bearing account.” What critical piece of the puzzle am I missing?

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10 Responses to “Why Use Zero-Percent Certificates of Indebtedness?”

  1. denon says:

    I have absolutely no clue, but I wondered this myself. I wondered if there was any tax advantage, though I highly doubt it. I also wondered if it could more easily be borrowed against than a normal liquid asset, but that seems a little odd. The only thing I could really come up with, is that I suppose in theory, this money would be safer than an FDIC-insured bank. After all, the FDIC could go under, but odds are govt bonds would remain the same.

    In reality, I think it’s just a fancy name for their internal credit memos, as I know that’s also what happens to money that fails an ACH transfer or such. It has to go somewhere, and since you don’t have an “account” with them persae, it goes into these certificates.

    Other brainstorms? :)

  2. Dave says:

    While for people as financially sophisticated as those who would read this blog it would seem rather silly to have your money in a non-interest bearing account, there is a very large percent of the population that keeps most of there day-to-day funds in such accounts. The regular savings/checking accounts at most large mainstream banks are essentially interest free (I do not consider 0.25% to be interest!, not with inflation around 3.5-4%) The only real benefit that I can see for this is a psychological one, if you (say) but 10% of your paycheck into this account and then ‘forced’ yourself to save with it. But yeah, I think it would be silly, I’d far prefer to keep all my funds in a 4% checking account and use that to make purchases when I need them.

  3. Caitlin says:

    Yeah I was wondering the same thing. Too bad they can’t add some nominal interest, then it might at least be worth one less step but 0 compared to 4% is pretty steep. I’d rather “collect” it in Emigrant or ING and make a purchase when I’m ready via ACH.

  4. MyMoneyBlog says:

    I figured it was something their lawyers came up with. They are technically not a bank so it’s not a savings account, but I agree a better term should have been thought up.

  5. Gary Boswell says:

    This appears to be an example of level of intelligency of our Federal Government. The normal accounting procedures used by the government would never fly anywhere else. They believe that this is a great idea. That way they can use that money until you officially give it to them by purchasing a US Saving Bond. I myself can see no reason why I would want to put money into this type of account when I could deposit it into a savings account. .025% is still more then Zero.

  6. Brian says:

    The answer is, when you roll over your treasury bill, you will get an ACH credit for the maturing bill AND an ACH debit for the new bill in your bank account, rather than a credit for the interest. Thus, for each T-bill that matures, you need an additional $1,000 in your bank account to cover it. With the Zero C of I, it just drops the interest differential there without the bank account hit.

  7. Greg says:

    Suppose you have a billion dollars and you don’t want to risk it in the Stock Market, and you don’t want to put it all in a single bank account (it’s only FDIC insured to $250,000 at present), and you don’t want to open dozens of bank accounts, and you don’t want to buy loads of precious metals, etc, etc…

    The Zero Point Certificate is not for schmoes like most of us. It is an appropriate and safe means of “banking” large sums of money for very wealthy people who are not looking for risk of any kind. (AND your funds are available for Treasury Note and Bond purchases).

  8. Laura says:

    I have the same question. Why should I put my money in a C of I that earns 0 interest when I can put it in a saving that will earn at least 2%? I am lost. I want my paper bonds back.

  9. Ron says:

    For emergency use by the federal gov’t to create debt free note to pay off debts

  10. Kevin says:

    Why do people buy gas cards for themselves (its popular with delivery and truck drivers)? Cause they know they’re going to always need gas. They don’t wanna get desperate one day when they want an expensive dinner knowing they may not have enough for gas again. It’s for people that aren’t good with money. If you wanna get a 52-week t-bill but because you know they suck, you only wanna put in a couple hundred bucks but you know the only way you can put away that $200 for yourself is to not have it in your bank account cause you’re a bad spender. So you put away like $66 bucks a month in the C of I and then when the t-bill becomes available in 3 months, you have that much to buy it. I wouldn’t use the C of I unless I just wanted to buy a low cost 52 week t-bill and I knew I didn’t have the self control to not spend it in the 3 months. but overall, if you have self control, it’s stupid to put $ in there for any period of time.


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