Savings Bond

A U.S. government bond issued in denominations ranging from $50 to $10,000, traditionally issued at a discount and redeemed at face value upon maturity.
On this page

Definition

A savings bond is a government debt security that earns interest over a set period. These bonds are issued by the U.S. Department of the Treasury and come in denominations ranging from $50 to $10,000. They were traditionally sold at a discount and are redeemed at their face value when they mature. Savings bonds are backed by the full faith and credit of the United States government, making them a very low-risk investment.

The types of U.S. savings bonds have evolved over time:

  • Series E Bonds: Issued from 1941 to 1979, these were known as “war bonds” during World War II.
  • Series EE Bonds: Introduced in 1980, these bonds are sold at face value and accrue interest monthly for up to 30 years.
  • Series HH Bonds: These are no longer issued as of 2004 but paid interest every six months directly to the holder’s bank account.

Examples

  1. Series E Bond:

    • A $50 Series E bond purchased in 1941 might have been bought for $37.50 and redeemed for $50 or more at maturity.

  2. Series EE Bond:

    • If you buy a $100 Series EE bond today, you would pay $100, and it would earn interest for up to 30 years, being worth more than its face value at maturity due to interest accrual.

  3. Series HH Bond:

    • Before issuance ended in 2004, a $1,000 Series HH bond paid fixed interest semiannually and returned the $1,000 principal at maturity.

Frequently Asked Questions (FAQs)

Q1: What is the interest rate on a Series EE bond?

  • Interest rates on Series EE bonds vary and are set by the Treasury. They combine a fixed rate and an inflation rate.

Q2: How do I buy a savings bond?

  • You can purchase savings bonds through the U.S. Treasury’s platform, TreasuryDirect. Physical paper bonds are no longer issued except as gifts and through tax refund purchases.

Q3: When can I cash in a savings bond?

  • Savings bonds can be cashed in after 12 months, but redeeming them before five years results in a penalty equivalent to three months’ interest.

Q4: Are savings bonds taxable?

  • The interest earned on savings bonds is subject to federal income tax but is typically exempt from state and local taxes.

Q5: Can I transfer a savings bond to someone else?

  • Savings bonds can be reissued in another person’s name or transferred through TreasuryDirect if they’re electronic bonds.

Q6: What is the maturity period of a savings bond?

  • Savings bonds mature up to 30 years, during which they accrue interest.

Q7: How does interest compound on Series EE bonds?

  • Interest on Series EE bonds compounds semiannually.

Q8: Are savings bonds a good investment?

  • Savings bonds are considered a low-risk investment with guaranteed returns, making them a secure choice for conservative investors.

Q9: What happened to Series HH bonds?

  • Series HH bonds are no longer issued as of 2004 but existing bonds continue to pay interest until maturity.

Q10: Is there a limit to how much I can invest in savings bonds annually?

  • Yes, individuals can purchase up to $10,000 each in electronic Series EE and I bonds annually, and an additional $5,000 in paper I bonds using tax refunds.
  • Interest Rate: The percentage of principal paid to an investor for the use of their money.
  • Face Value: The nominal value printed on the bond that is paid to the holder at maturity.
  • TreasuryDirect: The online financial services site operated by the U.S. Department of the Treasury for purchasing and managing savings bonds.
  • Inflation Rate: The rate at which the general level of prices for goods and services is rising.
  • Fixed Income Security: A type of investment that pays regular interest until maturity, at which point the principal is returned.
  • Yield: The earnings generated and realized on an investment over a particular period of time.

Online Resources

Suggested Books for Further Studies

  1. The Bond Book by Annette Thau
  2. Investing in Bonds For Dummies by Russell Wild
  3. The Only Guide to a Winning Bond Strategy You’ll Ever Need by Larry Swedroe
  4. Income Investing Secrets by Richard Stooker

Fundamentals of Savings Bonds: Finance Basics Quiz

Loading quiz…

Thank you for exploring the ins and outs of U.S. savings bonds and engaging with our Finance Basics Quiz. Keep expanding your investment knowledge for financial success!

Savings Element in Cash Value Life Insurance
Savings Bank