What Is a Savings Bond?

The savings bond is a form of Treasury bond issued by the United States government. There are several types of bonds currently in circulation, with the Series EE bonds being the usual bond type extended to an individual investor. Series I bonds are also available, while another form of the savings bond, the Series HH bonds, are no longer issued. All types of savings bonds realize a return on the investment assuming they are held until maturity.

Bonds issued by the US government first came into being in the days of World War I. With no means of obtaining financing from other countries, the government turned to the citizenry and offered them a chance to purchase what were known as Liberty bonds. As the bonds began to mature after the war, refinancing the debt associated with the bonds became was necessary.

Over time, the savings bond emerged as a very safe way to conservatively create a nest egg for retirement. Generally, the Series EE bond is what people think of when purchasing the bonds. These bonds are issued for half of the face value and will mature over a long period of time. To obtain the best return, it is advisable to hold onto the bond for the full thirty years of the maturation period. Since May 2005, new Series EE bond issues pay a fixed interest rate, while any EE bonds issued prior to that date accrue interest using a different formula.

Along with the Series E type of bonds, there is also the Series I. These savings bonds are issued at the full face value and offer a variable rate of interest that is tied directly to the current level of inflation. In fact, this rate has two components present. There is a base rate that is fixed for the entire life of the bond. The second component is a variable interest rate that is reviewed semiannually. While the Treasury Department establishes the fixed rate component, the adjustment of the variable rate is calculated using the Consumer Price Index.

The United States government imposes an annual limit on the purchase of savings notes. As of 2008, that limit is set at $5,000 in US Dollars, although it is possible to purchase both electronic bonds and double that figure. A paper savings bond can be purchased at a local bank or credit union. Electronic bonds can be purchased online at a secure site established by the US Treasury Department. The government also provides an online savings bond calculator that individuals may use to review the current value of their bonds.

There are benefits and liabilities associated with purchasing a savings bond. This type of investment carries almost no risk, thus ensuring the holder of the bond is sure to realize a return over time. However, the savings bond interest will be extremely small in comparison to other investment options. In addition, it is usually necessary to hold the bond for at least a five-year period after purchase, in order to avoid incurring any interest penalties.

While a savings bond will increase in value over the years, the growth is not subject to taxes until the bond is redeemed or until the bond reaches full maturity after thirty years. For people who prefer to pay taxes on the income earned later rather than now, purchasing a savings bond each year is a good option. However, there is always the chance that enough of the bonds will mature or be redeemed in the same calendar year, which could result in enough interest income to move the individual into the next highest tax bracket.