Savings bonds are one of the safest methods of investment. A person, who purchases bonds, lends money to the government for a period of time for a given rate of interest. Savings bonds are U.S. government debt obligation; bonds are endorsed by the Treasury Department and monitored by the Bureau of Public Debt.
Simplifying the term ‘Savings Bonds’
Savings Bonds are backed by the federal government and hence it can be considered as one of the safest types of investment. In case the bond gets lost or destroyed or gets stolen, it can be replaced since the savings bonds are registered with the U.S government. These bonds do not earn much interest compared to the stock market but they offer a way to save for the future. Savings Bonds cannot be cashed until at least six months after the purchase but interest is accumulated if the bonds are cashed after maturity. Banks no longer sell savings bonds. U.S bonds are in electronic form and citizens can purchase them directly from the Department of the Treasury. One advantage is that you can redeem the savings bonds at most of the banks.
Types of Savings Bonds
- Fixed Rate Savings Bonds
It is a type of savings account that lasts for a fixed period of time, during which the interests that you receive does not vary.
- Tracker Bonds
Unlike the Fixed Rate Savings Bonds, Tracker bonds are investment accounts where a part of the investment is kept as a security and the rest is invested in stocks. The term for tracker bonds is fixed for three and six years and these bonds attract variable interests.
Products offered by Treasury Departments
- Series I
Series I bonds are established upon Consumer Price Index (CPI) for urban buyers. These bonds pay a fixed base percentage of real interest that is determined at the time of purchase and is in sync with inflation on half yearly basis. The interest on these bonds consists of two modules: A and B. The A portion is set at purchase for the time period of the bond and portion B is adjusted every six months. The investment in Portion A will be received after the bond matures and Portion B is adjusted according to the level of consumer inflation. A composite rate that represents the rate of interest that will be received on the bond is determined by combining Portion A and Portion B.
- Series EE
Series EE bonds are bonds that are available at a discounted price. The interest earned on the bond is accumulated so that the bond matures with a high value. The interest is accrued monthly but is compounded semi-annually. Both these products are available to the citizens of U.S with a valid Social Security number.
Reasons to buy savings bonds
As savings bonds are backed by the U.S government, they are considered to be one of the safest investments available. The main benefits of purchasing bonds are as follows
- Competitive interest rates: :US government proposes interest rates competitive with the market. The bond’s interest payments are compounded semi-annually, and the interest calculated monthly is reinvested rather than paid out.
- Tax perks: In order to attract more people, US government issues savings bonds that are either tax-deferred or tax exempted. The interest income earned on the bonds is completely free of state and local tax and is postponed from federal tax until maturity or reclamation.
- Easy redemption: Bonds can be purchased online at the Bureau of Public Debt’s website. Redemption of the bonds savings is much easier as it only requires proper identification though you have or you do not have an account with them.
- Good for retirement: Bonds are considered as a safer investment method compared to stocks. Bonds pay interest every six months and hence can generate a steady stream of income post-retirement.
Disadvantages of Savings Bonds
Although Savings Bonds are the safest, there are still some cons.
- Long-term investment: You may have to wait for the bond to mature to enjoy the benefits.
- Restrictions and penalties: If you wish to redeem the bond before maturity, you will be restricted, or you will have to pay the penalty.
- Tax liability: Though you don’t have to pay local or state taxes for the bond, you are still subjected to pay the federal income tax.
- Buying limits: You can procure only 35 percent of the original offering if you want to purchase bonds through bidding process or auction.
Investing in Savings Bonds may be a good idea if you have time and patience to let the bonds fully mature. In case you purchase saving bonds in advance, it can come in handy for the days’ post-retirement or save for your children’s education or give them away as gifts for children. It is up to you to decide whether an investment in savings bonds suits your portfolio needs.