Zero-Percent Certificate of Indebtedness ???

[Craig]

I'm either very myopic, or the U.S. Treasury does indeed have a sense of humor!* *

What am I missing here?* Just signed up for their new Treasury Direct service, and I'm reading about their "C of I".* Shades of the late 19th century, when a stable dollar and less stable institutions reportedly led to depositors paying banks to hold their funds!

(my emphasis below)

_________________________________________________

Message

Subject: Product Notification

Date: 11-18-2005

Dear Charles:

Check out the new addition to the TreasuryDirect family of products--the Zero-Percent Certificate of Indebtedness (Zero-Percent C of I or simply, C of I) security. The Zero-Percent C of I is a Treasury security that does not earn any interest. It is intended to be used as a source of funds for traditional Treasury security purchases.

You may receive incoming credit transactions if you schedule regular payroll deductions with your employer or electronic deposits with your financial instituion. All incoming credits result in the automatic purchase of a Zero-Percent C of I within your account. For more information about the Zero-Percent C of I go to Manage Direct.

Thank you for investing through TreasuryDirect.


_________________________________________________

Zero-Percent Certificate of Indebtedness

The Zero-Percent Certificate of Indebtedness (Zero-Percent C of I or simply, C of I) is a Treasury security that does not earn any interest. It is intended to be used as a source of funds for traditional Treasury security purchases.

You may build the amount held in your C of I a number of ways:

Follow the Funding Options directions in Manage Direct to schedule regular payroll deductions with your employer or electronic deposits with your financial institution.
Select "Zero-Percent C of I" as the Product Type on Buy Direct to withdraw funds from a designated bank account (maximum of $1,000.00 per transaction).
Redeem securities in your TreasuryDirect account to "Zero-Percent C of I" instead of a traditional bank account.
Once you establish regular electronic deposits toward the purchase of your C of I, you can use it to schedule security purchases up to five years into the future. After you've accumulated enough for the security you wish to purchase, simply select "Zero-Percent C of I" as a Source of Funds in Buy Direct, and the security is purchased.

For your convenience, daily incoming electronic deposits are applied toward your C of I immediately prior to issuing other securities in your account. So, if your C of I balance is insufficient to cover a security purchase you've scheduled, that's okay. As long as any deposits to C of I are received for the purchase request date and the balance is sufficient, your security will be issued as scheduled. Note: Marketable securities are issued before savings bonds when C of I is selected as the Source of Funds.

Need one less worry about your security payments? If payments to your bank are returned to us for any reason, TreasuryDirect no longer stores them as undeliverable. Instead, we automatically deposit the returned funds in your C of I. Once there, you're free to purchase additional securities in your account or redeem all or part of it to your bank. It's your choice.

There's no limit to the amount you may hold in your C of I. [Chas ... gee, thanks! ]* All purchase and redemption activity is conveniently recorded in your C of I History.

Unexpected changes in your plans? Choose the option to redeem your C of I, and the amount you enter is redeemed from your C of I and deposited into your designated bank account. However, if you purchase a C of I by debiting your financial institution, the balance will be ineligible for redemption for five days. TreasuryDirect must initiate this hold, in the event your C of I purchase request is returned to us by your bank. Five business days following the receipt of the debit purchase, your funds are once again eligible for redemption.

[SteveR]

Sort of like taxes...if you over pay (and they pretty much assure you will due to underpayment penalties) they get to keep YOUR money until you file in April. I guess they just want to share "a good thing" with you even more.

[brewer12345]

Reminds me of what they did to the E series savings bonds. Th treasury has become a lot less consumer-friendly lately.

[Craig]

Boy, I'll say ... this is almost predatory.

[burch64]

I thought it (Zero-Percent Certificate of Indebtedness) is just a way to adjust your Treasury Direct account without actually transfering it to your checking or savings account.

For instance you have the 6 month t-bill, after 6 months they pay it to your Zero-percent account and you turn around and buy another 6 month t-bill without it going to your checking account.

If I am correct it makes sense to me.

[brewer12345]

Originally Posted by burch64

I thought it (Zero-Percent Certificate of Indebtedness) is just a way to adjust your Treasury Direct account without actually transfering it to your checking or savings account.

For instance you have the 6 month t-bill, after 6 months they pay it to your Zero-percent account and you turn around and buy another 6 month t-bill without it going to your checking account.

If I am correct it makes sense to me.

Makes sense except that they get the use of the money without paying interest.

[MooreBonds]

Originally Posted by burch64

I thought it (Zero-Percent Certificate of Indebtedness) is just a way to adjust your Treasury Direct account without actually transfering it to your checking or savings account.

For instance you have the 6 month t-bill, after 6 months they pay it to your Zero-percent account and you turn around and buy another 6 month t-bill without it going to your checking account.

If I am correct it makes sense to me.

You are correct in your above illustration...however, in the Treasury's own words, they offer another example: having automatic withdrawal by your employer to be added to your C of I balance to save up to eventually buy a treasury security. So, the treasury is also hoping you'll save up your stash of cash in a zero percent C of I until you have enough to buy a bond...and get an interest-free loan in the meantime.

It's essentially just like a bank that offers checking accounts that pay zero interest, yet also don't charge monthly fees for it...however, you can't bank from the C of I certificates, so it's not a true subsittute (or is the Fed hoping to one day start offering checking accounts? )

--Peter