Pin Me

The Basics of Choosing US Savings Bonds

written by: wendyppp•edited by: Laurie Patsalides•updated: 7/26/2010

Savings bonds have been around for decades, but many people don't know much about them If you have questions about the basics of choosing savings bonds, you've come to the right place.

  • slide 1 of 1

    What You Need To Know About Choosing Bonds

    Saving bonds are a great way to invest and save money without taking any risks. With saving bonds you can earn interest without any risks to your investment. This is especially useful if you are trying to save up some money for your child’s collage education.

    How Saving Bonds Work

    When trying to understand how savings bonds work its essential for you to understand that when you purchase something from the US government it’s like you are giving them a loan. It is like a financial obligation that the government has to the investor. After a preset period of time that loan matures once that happens you start getting paid back from Uncle Sam with interest. Since savings bonds are backed by a guarantee from the United States government they are considered to be a 99% safe investment. Savings bonds are similar to treasury notes and other legal bills with the only different between them being that treasury bills are a sort of short term investment i.e. for a period less than a year where as treasury notes have a maturity date between two to ten years. Saving bonds also known as treasury bonds can accrue a handsome interest until they are thirty years old.

    You will usually purchase savings bonds at fifty percent less than their face value. Let’s say for instance you purchase a savings bond with a face value of $10,000 you pay $5000 and after its maturity period (determined by the government) the bonds will be worth their original face value of $10,000. Also, the longer you hold on to these bonds the more they increase in value until it reaches its limit period.

    Perks of a Savings Bond

    Savings bonds are not only a safe investment they are also tax-exempt because they are issued by the US government. So you don’t need to pay either local or state taxes over them and if the money you get is used to fund your or your kid’s collage education then there is also no federal tax applicable. Taxes on the interest that has been accrued can also be postponed, this is one reason why parents purchase them as gifts for their kids in order to save money for their education.

    What You Should Know

    US savings bonds are both non-transferable and non-negotiable which means that there can be only a single owner, a partnership i.e. joint ownership, or primary owner and its beneficiary. In the case of primary owner and beneficiary, the possession of the bond goes to the beneficiary if the primary owner dies or goes missing. All tax obligations also fall into the hands of the beneficiary. Savings bonds can be purchased from banks or via the internet or even though payroll deductions. However, in the latter case, you might have to consult your employer first.

    Fixed and Variable Interest

    Some savings bonds may earn interest for up to thirty years during which the interest rate can either be fixed or adjusted at various set dates. It is however easier to compute the value of the bonds if the interest rate is fixed, this is one reason why fixed interest rate bonds are so popular.

    One drawback of fixed interest rate bonds is that inflation won’t really reflect any changes in the value of the bond. Series EE bonds are sold for fifty percent their value and are adjusted every six months. However, it’s hard to predict when their original face value will be regained. In addition, you can’t make money with them in a year. Electronic EE bonds are purchased and sold at their face value. Cashing and redeeming savings bonds can also incur a penalty or deprive you of some interest.

    For an overview of everything related to savings bonds, check out: All you Need to Know about Savings Bonds.