What Is a Government Savings Bond?
Among the numerous bonds offered by the U.S. Treasury are inflation-protected savings bonds. These bonds are low-risk, long-term investment tools that can be purchased in variable denominations, ranging from $50 to $10,000, and are therefore for savers great and small. They offer certain advantages relative to other forms of government bonds or commercial savings tools such as CDs.
Other People Are Reading
-
Types
-
The U.S. Treasury currently sells two kinds of savings bonds: I bonds and EE bonds. They once offered HH bonds, but this type of bond was discontinued in 2004. HH bonds are still held, but they can no longer be purchased.
Identification
-
Savings bonds differ from the standard types of Treasury bonds in that they are non-market securities. Unlike T-bills, for example, they cannot be bought and sold in the bond market. They are also inflation-protected: These bonds earn at a rate determined by a rate of interest plus the prevailing rate of inflation, adjusted periodically. There is a limit on purchases of both bonds of $5,000 per year. The interest from either form of bond can be tax exempt if the bonds are used to finance an education. Either can be redeemed after a year, but doing so before five years results in a three-month interest payment penalty.
-
Function
-
EE bonds have been sold at a fixed rate of interest since 2005 (albeit with the rate of inflation added). Therefore, the interest rate is never changed, although the add-on for inflation is. EE bonds purchased between 1997 and 2005 were based on a variable interest rate formula, with both the interest rate and the inflation rate being adjusted periodically. These bonds are sold at half their face value, so a $50 bond is sold for $25. However, it is not worth its face value until it matures. This is an encouragement to hold the bond for its entire tenure. They mature after 20 years, and earn interest for 30.
I bonds are purchased at face value. Their interest rate is also calculated differently, and is typically higher than that of an EE bond. They function much as one would expect a bond to: You buy them, and they earn interest. These bonds mature after 30 years.
Considerations
-
Both forms of bonds offer a savings-investment tool that is protected from inflation, and generally speaking investing in bonds is more rewarding when interest rates are high and the term is fixed. I bonds are a good, general-purpose tool. EE bonds should be used only for long-term investments, since they truly pay off only between their 21st and 30th years.
Expert Insight
-
The $5,000 purchase limit and $10,000 maximum denomination seem contradictory. It is probable that the $10,000 denomination represents bonds that are no longer sold, but no information on this is available from Treasury Direct.
-
