How Do Savings Bonds Work?

Illustration of a bank door or financial building and a savings bond
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A savings bond is an investment instrument offered by the federal government. When you buy a savings bond, you loan money to the U.S. government in exchange for a return at a future date.

What Is a Savings Bond?

Savings bonds are debt securities that fund U.S. government spending. They are considered one of the safest investments because they are guaranteed by the federal government.

Features of Savings Bonds

Savings bonds are available in small denominations, with a face value between $25 and $10,000. Face value, also known as par value, is the amount that will be paid when the bond matures, or comes due.

Savings Bonds Features:

  • Interest: Savings bonds earn interest at a nominal rate.
  • Taxes: Interest is taxable, but it is deferred until you cash the bond. Savings bonds are not subject to state or local taxes.
  • Transferability: You can transfer savings bonds to another person at no charge as soon as five days after purchasing them.
  • Age requirements: Minors can hold savings bonds in their own names.
  • Payroll Savings Plan: With a payroll savings plan, you can deposit part of your paycheck directly to your Treasury account to automatically purchase savings bonds.

Building Wealth

How Do Savings Bonds Work?

The purchase price of savings bonds is the same as their face value. You pay $100 for a $100 savings bond, but the value of the bond increases over time.

Savings bonds come in two versions: Series EE and Series I.

  • Series EE: These bonds have a fixed interest rate for the life of the bond.
  • Series I: These bonds earn interest at a composite rate that can change semi-annually.

Series EE and Series I savings bonds earn interest for 30 years. The interest is added to the bond each month and compounds semi-annually.

Interest on a Savings Bond

Say, for example, you buy a Series EE savings bond for $100 that earns 0.10% interest per year. One month’s worth of interest is added to the $100 principal amount each month.

After six months, the bond is worth $100.05. It earns interest on this principal amount for the next six months, after which the interest compounds again.

How To Buy Savings Bonds

To purchase a savings bond, you need a TreasuryDirect account, which also allows you to manage your bonds at your convenience. To find out exactly what your bonds are worth (or could be worth), check out the Savings Bond Calculator at TreasuryDirect.

Building Wealth

Types of Savings Bonds

Two types of savings bonds are available: Series EE bonds, which are traditional savings bonds, and Series I bonds, which carry an inflation-adjustment component.

Some discontinued bonds are still earning interest, including Series HH bonds and Patriot Bonds. Series HH bonds were available from 1980 through August 2004. They earn interest for up to 20 years.

Patriot Bonds were sold from 2001 until 2011. This was a special type of Series EE bond issued on paper. All paper savings bonds were discontinued at the end of 2011.

Series EE U.S. Savings Bond

You purchase Series EE savings bonds at face value, but the Treasury Department guarantees that the bonds will at least double in value after 20 years. These bonds continue to earn interest after that period, for up to 30 years total.

Here are more details about Series EE savings bonds:

  • Face value: Minimum of $25, available in penny increments
  • Maximum available for purchase: $10,000
  • Interest terms: 0.10% for bonds purchased between May 2020 and October 2020
  • Holding period: Up to 30 years; no penalty for cashing bonds after 5 years

Series I U.S. Savings Bond

Series I bonds are similar to Series EE bonds, but are affected by both a fixed rate and an inflation rate.

  • Face value: Minimum of $25, available in penny increments
  • Maximum available for purchase: $10,000
  • Interest terms: 1.06% for bonds purchased between May 2020 and October 2020
  • Holding period: Up to 30 years; no penalty for cashing bonds after 5 years

How To Cash in Savings Bonds

You can cash in savings bonds at your local bank or through the U.S. Department of the Treasury. Here’s how to cash them:

Paper Bonds

To cash a paper savings bond, present the bond and an acceptable form of identification to a bank. If you’re a beneficiary cashing the savings bond of a deceased person, you will also need a certified death certificate.

Alternatively, you can complete FS Form 1522 and sign it at a bank for signature verification. Mail the form along with the unsigned savings bond to the U.S. Department of the Treasury.

Electronic Bonds

To cash electronic savings bonds, log in to TreasuryDirect. Follow the onscreen steps for cashing a savings bond.

Are Savings Bonds a Good Investment?

A savings bond’s security — the financial backing of the U.S. government — can be attractive to a cautious investor. Savings bonds do increase in value over time, and they remain popular as gifts. Even so, they may not be the best choice for all situations.

Here’s a quick look:

Pros:

  • Low risk
  • Guaranteed returns
  • Protection against inflation

Cons:

  • Minimal returns
  • Slow growth

As with any investment, research your options and choose the one that best fits your financial goals.

This article has been updated with additional reporting since its original publication.

Our in-house research team and on-site financial experts work together to create content that’s accurate, impartial, and up to date. We fact-check every single statistic, quote and fact using trusted primary resources to make sure the information we provide is correct. You can learn more about GOBankingRates’ processes and standards in our editorial policy.

About the Author

Sean joined the GOBankingRates team in 2018, bringing with him several years of experience with both military and collegiate writing and editing experience. Sean’s first foray into writing happened when he enlisted in the Marines, with the occupational specialty of combat correspondent. He covered military affairs both in garrison and internationally when he deployed to Afghanistan. After finishing his enlistment, he completed his BA in English at UC Berkeley, eventually moving to Southern California.

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