Savings bonds are issued by the US Treasury and Debt Securities. Proceeds from the sale of these securities are used to pay for US government borrowing needs. Supported by the full faith and credit of the United States, they are considered one of the safest investments in the world. Savings bonds are also exempt from state and local taxes, and interest on earnings can be deferred until redemption, unlike interest earned on regular savings accounts and CDs, whereby earned interest is fully taxed as ordinary income each year.
Savings bonds are also different from most other bonds on the market, as in most cases they cannot be sold to maturity. Therefore, they should be considered a long-term investment. In addition, since savings bonds are registered securities, if they are lost, stolen or destroyed, they can be replaced.
U.S. savings bonds can be purchased from commercial banks or online (Series I bonds must be purchased through a bank). Since most commercial banks play the role of a U.S. Treasury agent, a buyer of savings bonds can fill out forms at the bank and then forward them to the state treasury. The customer will receive the paper link (s) in the mail a few weeks later. Until January 1, 2011, paper bonds can also be purchased by refusing a payroll from many employers.
update : Since this article was originally published, changes have been made to the way US bonds are purchased. Today’s purchases are electronic (paper bonds are no longer issued), and you can buy the bonds online at Treasury Direct.
It is important to note that the United States Treasury periodically changes the rules for these bonds. Accordingly, interest rates will change depending on the date of purchase of the bond and the series purchased. Consequently, two types of savings bonds are issued today and those that were available for purchase in exchange for an existing bond:
Series I bonds
The Trade Union and Savings Bonds (“Series I Bond”) was introduced on September 1, 1998. The main purpose of issuing Series I bonds was to protect investors from inflation. Consequently, Series I bonds are sold by nomenclature and grow with inflation-indexed earnings of up to 30 years. Since Series I bonds are indexed to inflation, the buyer does not have to worry about inflation, as bond yields change to reflect changes in the economy.
Series I bonds are accrual types of bonds that mean that interest is added to the monthly bond. Interest is charged on the first day of the month and is paid semi-annually. The earnings rate for the first series of bonds is determined by a fixed rate of return plus a semi-annual inflation rate. During the connection, the fixed rate remains unchanged. The semi-annual inflation rate, published on 1 May and 1 November , changes based on the Consumer Price Index (CPI), calculated by the Bureau of Labor Statistics.
You can buy up to $ 5,000 in Series I bonds in any calendar year. Series I denominations for bonds can be purchased in increments of: $ 50, $ 75, $ 100, $ 200, $ 500, $ 1,000 and $ 5,000. Series I dinar bonds mature (discontinued earnings) 30 years from the date of issuance of the bond and announce the final interest due on the first day of the final maturity. If the I Bond series is collected in the first five years, the investor is punished by the loss of interest in recent months; after 5 years, the investor is not penalized. Interest may be deferred until the bond is calculated or published annually on the investor’s federal tax return. Ownership of Series I bonds may be transferred; however, such transfers are subject to more restrictions than transfers of other types of bonds.
As an example, an investor who bought the I Bond series on May 1, 2010 would earn a compound rate of 1.74%. This rate includes a fixed rate of 0.20% over the life of the bond, as well as a semi-annual inflation rate announced in May 2010 of 0.77%. To reach 1.74%, the following formula is applied:
Composite rate = [Fixed rate + (2 k Semi-annual inflation rate) + (Fixed rate k Semi-annual inflation rate)]
It is important to note that the fixed rate will remain the same, but the semi-annual inflation rate will change every six months in May and November, at any rate that is determined.
EE series bonds
Mandatory serial EE bonds (“EE series bonds”) were originally offered on July 1, 1980, to replace E-series serial bonds, which were withdrawn from sale. EE series bonds are issued for 30 years, and the principal and interest are paid in a lump sum on redemption.
EE series bonds are purchased at a discount of half the face value and are sold in denominations of 50, 75, 100, 200, 500, 1000, 5000 and 10000. You cannot buy more than $ 5,000 (face value) during a calendar year. EE series bonds are guaranteed to be worth at least their face value at the end of their term, but they generally reach value earlier and continue to grow in value.
EE series bonds are re-evaluated semi-annually and assigned to market rates. Unlike Series I bonds, there is no inflation component. The EE Bond series started as a variable rate bond, tied to 90 percent of the average five-year yield on treasury securities for the previous six months. However, as of May 1, 2005, the United States Treasury has made the Series EE Bonds a fixed interest rate bond. A new rate is still issued every six months, but the rate you get when you buy a bond is the one you receive for as long as you have the bond. The rate is now tied to the 10-year Treasury average for the previous month. For example, bonds issued between May, 2010 and October 2010 have a fixed interest rate of 1.40% over the life of the bond. Since these bonds earn interest that varies depending on the current economy, he never knows when the bond will reach its face value. This means that a series of EE savings bonds could be worth more than face value when it reaches its maturity. It is therefore advisable to cash in the EE Bond series after it reaches face value, but before the maturity date (30 years after issuance) when the bond ceases to earn interest.
Ownership of EE series bonds can be transferred, which is called a “reissue” by the US Treasury, provided that certain tax considerations are resolved. The government has extended the duration of the EE Bond series before it can be collected. As of February 1, 2003, the minimum retention period lasted from six months to one year.
Series HH bonds
HH series bonds were available for purchase in exchange for EE or E series bonds and securities, or with income from mature HH series bonds. As of September 1, 2004, this was no longer an option. Similar to Series I bonds, Series HH bonds are purchased at a personal amount of $ 500 to $ 10,000; However, there is no limit to the amount you can buy. These bonds make their taxable payments of new interest every six months. The new interest is exempt from state and local taxes, but is subject to applicable federal taxes. The advantage of HH series bonds was that they could be used to extend the taxation of interest on EE series bonds and provide income. Series HH bonds have a maturity of 20 years.
Savings bonds are an ideal way to ensure a secure investment that will grow in the long run. They can often be used as gifts for birthdays, weddings or graduations. The bondholder, however, should be aware of the rates and special rules applicable to the series he holds, as well as the value at maturity or when it reaches monetary value, including interest to come. Happy and happy frugal hunting!
