Now that you have a good grasp on what bond insurance is, we’ll get into savings bonds and how they work.
What is a savings bond?
A U.S. Savings Bond is a U.S. government savings bond that offers a fixed rate of interest over a fixed period of time. These bonds are not subject to state or local income taxes, which makes them appealing to many. These bonds, however, can't be transferred easily and are non-negotiable.
Savings bonds are virtually risk-free. Seriously. Even if the bond is lost or destroyed, it can still be replaced - since savings bonds are registered with the government. Although they don't earn much interest compared to the stock market, they do offer a much less volatile source of income. They also can't be cashed until at least six months post-purchase, and the longer you wait to cash the bond, the more interest it earns. This makes these bonds great for saving for the future.
How do savings bonds work?
Savings bonds pretty much work like other bonds. They’re essentially a loan that you make to the U.S. government. Like T-bills, savings bonds are debt securities issued by the Department of Treasury.
There are 2 different types of savings bond: Series EE and Series I. Both are purchased for face value and both must be held at least one year. After five years, they can be redeemed without penalty. Series EE bonds pay a fixed rate of return and are guaranteed to at least double in value in 20 years.
How (and where) to buy savings bonds?
As of 2012, savings bonds can now be purchased online. You can buy them through the Treasury-s website or through an employer-sponsored plan. You can buy any denomination from $25 and up, with a calendar limit of $10,000.
Previously, paper savings bonds were purchased at half of face value. The bond would be redeemed for full face value at maturity. Recently, however, savings bonds have gone online. This is why they were called “zero-coupon” bonds – you got all your interest payments and principal back when the loan came due! Today…savings bonds earn interest regularly.
Where to cash / redeem savings bonds
Cashing savings bonds can be done in a bank or online. Many local banks will happily redeem your savings bonds for you, but you can also use the Treasury’s website if purchased electronically. Just keep in mind that there is a penalty for early redemption! Try not to cash in before 5 years, unless absolutely necessary, because you will lose three months’ interest.
Savings bonds are really great for saving for the future. If you want to learn more about them, check out our Investing in Different Markets course today!