Federal Reserve Savings Bonds Information
The United States Department of the Treasury offers savings bonds as a very secure investment for bond holders. Because chances of the government defaulting on its debt is virtually nonexistent, the interest rates offered will be lower than other investments like stocks. Investors can buy either of two types of bonds.
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History
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The first major bond drive occurred during World War I when Liberty Bonds were sold to help the United States finance the war. President Woodrow Wilson ceremonially bought the first bond. In 1941, the Series E bond was introduced to help pay for World War II with President Franklin Roosevelt ceremonially buying the first bond. The Series EE bond was introduced three months after September 11, 2001, and was dubbed the Patriot Bond because proceeds would be used to defend the United States against terrorism.
Types
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You are limited to buying no more than $5,000 worth of savings bonds in a calendar year. Series I bonds are priced by their face value while Series EE bonds sell for half of their face value. Both types of bonds have 30-year terms after which they will cease earning any interest. You are allowed to cash in your bonds after one year, but if you cash them in before five years have passed, you will lose three months worth of interest.
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Rates of Return
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The difference between Series EE bonds and Series I bonds are the way the rate of return is calculated. Series EE bonds have a fixed rate of interest for the entire term of the bond that does not change--regardless of changes in the inflation rate. The only exception is that if the set rate does not result in the value of the bond doubling within 20 years, the government will add an extra payment at the 20th year to double the value. Series I bonds have a fixed rate of return and a component that is inflation based, so the rate will fluctuate every six months.
Tax Flexibility
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Unlike most investments where you have to pay taxes on interest as it accrues regardless of when it is paid, you have the option to pay taxes on the interest you earn on savings bonds when you cash out the bond. In addition, interest on Federal Reserve savings bonds is exempt from state and local taxes.
How to Buy Bonds
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Savings bonds can be bought either through the Department of the Treasury's online purchasing program called Treasury Direct or at many banks around the country. In order to purchase bonds, you will need your Social Security number and government issued identification like a driver's license. It does not matter where the bonds are purchased because they can be redeemed at any institution that sells them.
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