Savings Bonds Basics

What exactly are Savings Bonds?

Savings bonds are a type of financial vehicle for saving money. They were originally called “Liberty Bonds” as they were created for the sole purpose of helping the US finance their involvement in World War I. Although savings bonds have a lengthy history, the United States Treasury Department began gutting the savings bond program in 2002 by closing their marketing offices and lowering the amount of interest paid on the bonds.

Some of the different types of savings bonds

The US Treasury Department issued several types or “series” of savings bonds over the past years. The following were some of the more common series that were issued:

Series EE – these savings bonds take 30 years to reach their final mature and are initially issued at 50% of the bond’s face value. As the bond matures over the 30-year period, interest is added to the value of the bond. It usually takes 17 years for this type of savings bond to attain its face value. However, you are allowed to hold them for up to 30 years should you choose to do so.

Series HH – unlike certain agency issues and US Treasury Bonds (or T-Bonds), these are non-marketable savings bonds and are usually sold at a discount and eventually mature at face value. As is the case with other savings bonds, Series HH bonds pay interest on a semi-annual basis. Despite the fact that many Series HH bonds have yet to mature, the US Treasury Department stopped issuing these at the end of August in 2004.

Series I – based on inflation rates, these savings bonds will have variable yields However, these bonds are issued at face value. The key characteristic of Series I bonds is a dual component interest rate. One of the rates is fixed and stays constant throughout the life of the savings bond. The other interest rate is a variable one which gets reset every 6 months from the time it is issued. This resetting stems from the effects of inflation on the value of US currency.

Treasury Bonds (T-Bonds or long bonds) – these take the longest to mature, usually 20 to 30 years and has a coupon payment that comes due every 6 months just like T-Notes. They are usually issued with a maturity term of 30 years. Beginning in October of 2001 and ending in February of 2006, the issuance of US Treasury Bonds was temporarily suspended. During the late 1990’s, the Treasury Department began issuing the 10-year Treasury bond in order to replace the 30-year ones.

A few tips for buying Series EE Bonds

You can purchase Series EE bonds at numerous brokerage firms as well as your bank or other financial institutions. Some employers offer savings bonds by virtue of deductions from your paycheck. Series EE bonds come in a variety of denominations from $50 up to $10,000 so you need to determine how much your budget will allow you to spend when considering the purchase of these savings bonds.