U.S. savings bonds

Definition

U.S. savings bonds are debt securities issued by the United States Department of the Treasury, and are considered one of the safest investments available because they are backed by the full faith and credit of the U.S. government. 

What are U.S. savings bonds?

Savings bonds are designed to provide a secure way for individuals to save money and earn a modest return on their investment over time.

There are two main types of U.S. savings bonds: 

• Series EE bonds: Series EE bonds are purchased at a discount to their face value, and they earn a fixed rate of interest for up to 30 years. These bonds can be redeemed for their full face value plus accrued interest after holding them for at least one year. 
• Series I bonds: Series I bonds are inflation-protected savings bonds that earn interest based on a combination of a fixed rate and the rate of inflation. The interest rate on Series I bonds is adjusted semi-annually. Like Series EE bonds, Series I bonds can be redeemed for their full face value plus accrued interest after holding them for at least one year.

U.S. savings bonds offer several advantages. This includes that savings bonds can be purchased directly from the U.S. Treasury’s website or through most financial institutions. Furthermore, the interest earned on savings bonds is exempt from state and local income taxes, and it may be exempt from federal income taxes if the bonds are used for qualified educational expenses.

However, savings bonds typically offer lower interest rates compared to other investments, which may not keep pace with inflation. Additionally, if savings bonds are redeemed before they reach five years of age, investors may lose the last three months’ worth of interest.

Example of U.S. savings bonds

Investor A purchases a U.S. Treasury bond with a face value of $10,000 and a fixed interest rate of 2% per annum. The bond matures in 10 years, and Investor A receives semi-annual interest payments of $100 ($10,000 x 2% / 2) for the duration of the bond’s term. At maturity, Investor A receives the original principal amount of $10,000 back from the U.S. Treasury.