How Do Savings Bonds Work?
Many people want to know: "How do savings bonds work?" Savings bonds are issued by the Treasury Department of the United States and can be purchased in local banks and credit unions. Many take it as a conservative way of investing money that earns interest for a certain period of time.
- There are two types of savings bonds. These are the Series EE savings bonds and the Series 1 savings bonds. The series EE savings bond is issued in half of its face value and earns a fixed interest rate. The series 1 savings bonds is one issued in its full face value and earns a variable interest rate that is tied with the inflation rate.
- A savings bond is a secure investment. Anyone can own the bond, such as corporations, individuals, and associations. The requirement is that you are a citizen of the United States of America with a social security number. Even minors are entitled to own a savings bond, unlike other forms of bonds.
- It takes time before you can redeem the savings bonds. This is because the amount you invest needs to earn interest. Depending on the kind of savings bonds you get, the interest is calculated on a fixed rate or on a variable rate. Inflation affects the calculation of the interest when using the variable rate and the Treasury Department uses the Consumer Price Index for calculating the variable interest rates. One year is the minimum period before one can redeem a savings bond.
- The amount of your return of investment from savings bonds will depend on the term of redemption that you choose and the interest rate. The longer the savings bonds earn interest, the higher will be your return of investment. Furthermore, the inflation rate will also affect how much interest your savings bond will earn. Most often, the maximum period for redemption is 30 years and the minimum is one year.
- Savings bonds are not taxable until their redemption period. The value of savings bonds increases every year, but they are not subject to tax until they are redeemed or upon reaching full maturity.