What Is the Difference Between a Treasury Bond & a Savings Bond?

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Treasury bonds function significantly differently than U.S. savings bonds.
Treasury bonds function significantly differently than U.S. savings bonds. (Image: Creatas/Creatas/Getty Images)

The federal government through the Department of the Treasury borrows money by issuing a range of types of debt securities and savings certificates. Treasury bonds and savings bonds are two quite different forms of government-issued investments. The only feature they have in common is a 30-year time from issue to maturity.

Buying Bonds

Treasury bonds are marketable securities that can be purchased through the regular auctions from the Treasury or in the secondary bond market. An individual can buy up to $5 million worth of bonds at the auction or larger amounts in the secondary market.

Savings bonds are registered to an individual owner and are purchased in paper form at banks or through payroll savings plans. Electronic savings bonds can be bought with an account at the TreasuryDirect website. An individual is limited to buying a maximum of $5,000 worth of each type of savings bonds in any calendar year.

Earning Interest

Treasury bonds are issued paying a fixed interest rate called the coupon rate. Interest from a Treasury bond is paid to an investor in two semi-annual payments. For example, a $100,000 Treasury bond with a 5 percent coupon would pay $2,500 in interest every six months.

Savings bonds accrue interest to a bond's value. Interest is earned monthly and compounds semi-annually. Series EE savings bonds earn a fixed rate of interest for the life of a bond. Series I savings bonds earn interest adjusted for the inflation rate. A new inflation factor is declared every six months.

Cashing/Redeeming Bonds

Treasury bonds as marketable securities can be sold at any time through an investment dealer or broker. The price received may be higher or lower than the face amount, based on current market interest rates.

Savings bonds can only be redeemed by a registered owner at a bank or with the Treasury. Savings bonds cannot be redeemed for one year after purchase and there is an interest penalty charged against savings bonds redeemed in the first five years. The redemption value of a savings bond will be the original amount paid plus the accrued interest.

Interest Rates

The current interest rate for Treasury bonds is set by the auction process and the pricing of bonds in the secondary market. The rates will change based on investor belief concerning future inflation and interest rates. As of June 8, 2011, the 30-year Treasury bond rate from the most recent auction was 4.375 percent.

Savings bond rates are set by the Treasury each May and November. As of May 2011, the rate for new series EE bonds was 1.10 percent and I bonds were earning 4.60 percent.

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