How do savings bonds work?
Credit:Peter GridleyStockbyteGetty Images
Q:

How do savings bonds work?

A:

Quick Answer

Modern U. S. savings bonds are essentially a loan from purchasers to the U. S. government. They are purchased online at face value through the U. S. Department of the Treasury and accrue annual interest for up to 30 years until they are cashed in. Bonds may be cashed in as soon as six months after purchase, but bonds cashed in early are penalized the last three months' worth of interest.

 Know More

Full Answer

The two types of savings bonds, the EE and the I, differ primarily in how interest is calculated. The EE earns a rate based on 5-year Treasury security yields, while the I earns a variable rate indexed to inflation. Both are available for purchase online at Treasury Direct, a government website. Bonds purchased today are electronic-only. According to Susan Tompor at USA Today, the Department of the Treasury ceased issuing paper bonds in 2012.

Savings bonds often earn low interest relative to other securities, but that does not necessarily mean they are worthless. The Internal Revenue Service explains in its Publication 970 that Series EE and I savings bonds can be used as tax-free savings instruments for certain college expenses, including tuition and fees. Dorothy Rosen at Bankrate.com adds that interest earned on U. S. savings bonds is exempt from state and local tax in all cases, and even federal tax is deferred until the bond is cashed in.

Learn more about Investing

Related Questions

  • Q:

    Where can you buy savings bonds?

    A:

    As of November 2014, the public can purchase savings bonds directly from the U.S. Treasury by using the department's Web-based system called TreasuryDirect. Paper-based savings bonds can no longer be purchased from financial institutions such as banks and credit unions.

    Full Answer >
    Filed Under:
  • Q:

    Is there a difference in value between E series bonds and EE series bonds?

    A:

    The difference between E series and EE series savings bonds is not value but time of issue, according to Treasury Direct, a service of the U.S. Department of the Treasury. The Treasury Department initiated series E savings bonds in 1941 and replaced them with EE series bonds in 1980.

    Full Answer >
    Filed Under:
  • Q:

    How do you cash a Series EE bond?

    A:

    Bond owners can cash electronic Series EE savings bonds by logging on to the U.S. Department of the Treasury's TreasuryDirect website. Owners can redeem paper Series EE bonds by taking them to a local bank or mailing them to the Federal Reserve Bank of Minneapolis, notes TreasuryDirect.

    Full Answer >
    Filed Under:
  • Q:

    How do you buy savings bonds?

    A:

    To buy savings bonds, individuals can create an online account with the U.S. Department of Treasury to purchase, manage and monitor savings bonds online. In order to purchase savings bonds, individuals must be a U.S. citizen, U.S. resident or civilian employee in the United States.

    Full Answer >
    Filed Under:

Explore