Savings Bond

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.

Related Terms

• 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

• TreasuryDirect - U.S. Savings Bonds
• Investopedia - Savings Bonds
• Bankrate - Savings Bonds

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

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!