Definition
A U.S. Savings Bond is a debt security issued by the U.S. Department of the Treasury to help fund federal spending, offering a secure way for individuals to save money and earn interest over a long term. These bonds are one of the safest investment options because they are backed by the full faith and credit of the U.S. government. U.S. Savings Bonds typically come in two series: Series EE and Series I.
Series EE Savings Bonds
- Series EE Bonds are purchased at face value and pay a fixed interest rate. They are guaranteed to at least double in value over the first 20 years, and they can earn interest for up to 30 years.
Series I Savings Bonds
- Series I Bonds are sold at their face value and earn interest through a combination of a fixed rate and an inflation rate. This makes them beneficial in periods of inflation, as they provide a return above the rate of inflation.
Examples
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Purchasing a Series EE Bond: An investor buys a Series EE bond for $200. After 20 years, the bond will be worth at least $400 due to the U.S. Treasury’s guarantee of doubling its value at maturity.
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Series I Bond and Inflation Protection: An individual purchases a Series I bond with a fixed rate of 0.5% and adds an inflation adjustment that follows the Consumer Price Index (CPI). If inflation rises to 3%, the bond earns approximately 3.5%.
Frequently Asked Questions
What is the minimum purchase amount for U.S. Savings Bonds?
The minimum purchase amount for electronic U.S. Savings Bonds is $25, while paper bonds are no longer issued since 2012.
How are taxes applied to savings bond interest income?
Interest earned on U.S. Savings Bonds is subject to federal income tax but is exempt from state and local taxes.
How long do I have to hold a U.S. Savings Bond before I can cash it?
You must hold a U.S. Savings Bond for at least one year before you can cash it. However, if you cash it before five years, you’ll forfeit the last three months of interest.
Can I purchase U.S. Savings Bonds through my bank?
As of January 1, 2012, paper savings bonds are no longer sold at financial institutions. Instead, you can purchase electronic savings bonds online through the TreasuryDirect website.
What are the differences between Series EE and Series I Savings Bonds?
Series EE bonds are guaranteed to double in value over 20 years and favor stability, whereas Series I bonds provide protection against inflation with a combination of fixed and variable interest rates.
Related Terms
- Treasury Bond: A long-term U.S. government debt security with a fixed interest rate and maturity period of more than 10 years.
- Fixed Income Security: A type of investment that provides regular income in the form of interest payments.
- Inflation Rate: The rate at which the general level of prices for goods and services is rising, and subsequently, eroding purchasing power.
Online References
- TreasuryDirect: Official website for buying U.S. Savings Bonds and other Treasury securities.
- Investopedia on U.S. Savings Bonds
- U.S. Department of the Treasury
Suggested Books for Further Studies
- “The Bond Book: Everything Investors Need to Know About Treasuries, Municipals, GNMAs, Corporates, Zeros, Bond Funds, Money Market Funds, and More” by Annette Thau
- “Bond Investing For Dummies” by Russell Wild
- “The Intelligent Investor: The Definitive Book on Value Investing” by Benjamin Graham
- “Fixed Income Securities: Tools for Today’s Markets” by Bruce Tuckman and Angel Serrat
Fundamentals of U.S. Savings Bonds: Investment Basics Quiz
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