What Is a Savings Bond?

Savings bonds can balance and diversify your portfolio.

Issued by the U.S. government, savings bonds are among the safest investments available. A bond typically will not earn a very high return, however, since savings bonds lie at the conservative end of the investment spectrum of bonds versus stocks.

Inflation can eat into the returns of certain savings bonds, but other bonds have rates that are adjusted for inflation. Examine all aspects of a U.S. savings bond before deciding to add one to your portfolio of stocks and bonds.

Savings Bond Definition

A savings bond is a debt instrument. Similar to other bonds, when you buy a savings bond, you are loaning money to the issuer — the U.S. government. Savings bonds are issued in small denominations, with a face value between $25 and $10,000. Face value, also known as par value, is the amount the bond will pay when it matures or comes due. Two types of savings bonds are available: Series EE, which are traditional savings bonds, and Series I, which carry an inflation-adjustment component.

Savings Bond Interest Rate

Series EE savings bonds issued since May 2005 earn a fixed interest rate, while Series I bonds combine a fixed rate and an additional rate based on inflation. Newly issued bonds earn the current interest rate at the time of issue. For bonds issued from Nov. 1, 2017, through April 30, 2018, Series EE bonds earn 0.10 percent interest and Series I bonds earn a combined rate of 2.58 percent.

Older bonds earned interest in different ways. For example, paper EE bonds used to be sold at half their face value, paying off the full value at maturity.

Interest on savings bonds is compounded semiannually. You can redeem a bond after holding it for at least 12 months. Cashing in a savings bond during the first five years will forfeit the most recent three months of interest earned.

Learn More: How to Cash Savings Bonds

How to Buy Savings Bonds

Series EE bonds are only available for purchase from the Treasury directly at the U.S. government website TreasuryDirect.gov. Although banks and credit unions previously sold paper EE savings bonds, as of 2011 you can only buy an e-bond via the website.

You pay face value for a savings bond and can designate the amount down to the penny. You can also buy bonds via payroll direct deposit, in which an employer sends money directly to the Treasury to purchase bonds on your behalf.

Other types of bonds are also available for purchase on this website, including U.S. Treasury bonds, notes or bills.

Related: How to Choose the Best Bonds for Your Portfolio

Savings Bond Tax Issues

U.S. savings bonds are taxable at the federal level but not the state or local level. The tax is not due until you redeem the bond or it matures. Municipal bonds, by contrast, are not federally taxable.

Who Should Buy Savings Bonds

The bond is registered during the purchase, which means if you lose the certificate, you can usually have it replaced by providing the serial number and issue date of the bond, along with your address and Social Security number.

Savings bonds are backed by the full faith of the U.S. government. Because the U.S. government is unlikely to default, investing in savings bonds is a safe and secure investment. For people who are looking for high and quick returns, however, and those with a long horizon for investing, savings bonds might not be the best choice.

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