U.S. savings bonds: What they are, types and how they work

American savings bonds are long-term investment options for those seeking stability and a secure way to grow their money.

Issued directly by the U.S. government, they are an accessible option for anyone looking to build a reliable financial reserve, whether to supplement retirement or achieve other long-term goals.

With various bond series available, each with its own interest features and inflation protection, these bonds stand out for their simplicity and security.

Read on to learn more about U.S. savings bonds and how they work.

What are savings bonds?

Savings bonds, issued by the United States Department of the Treasury, are a secure and accessible form of investment that allows American citizens to lend money to the government and receive interest in return.

Created to promote the habit of saving and to contribute to funding government projects, these bonds are recommended for conservative investors, particularly those seeking a low-risk investment for long-term reserves.

Since they are guaranteed by the federal government, savings bonds offer high security, though they usually yield more modest returns.

These bonds are particularly suitable for those who want to ensure gradual financial growth over the years.

They can be purchased online through the official Treasury website, TreasuryDirect, making the buying and management process more accessible. They are a good choice for savings goals, such as emergency funds.

How do they work?

Savings bonds work simply: the investor purchases the bond and, over time, accumulates interest, which is paid to the holder when the bond is redeemed.

There are different types of bonds, each with unique interest characteristics and terms.

Savings bonds do not offer continuous interest withdrawals; instead, interest accrues and can only be accessed after the minimum holding period or maturity.

The applicable interest rates for saving bonds depend on the bond type and the economic conditions at issuance.

For instance, Series I bond offer a return that combines a fixed rate with a variable rate based on inflation, providing some protection against loss of purchasing power.

Different types of savings bonds

There are three main types of U.S. savings bonds: Series E, Series EE, and Series I. Each type has its own characteristics, with variations in returns, terms, and interest adjustment strategies. Below, we detail the features of each.

Series E bonds

Series E bonds were initially created during World War II as war bonds to help finance the country’s efforts.

Although no longer available for purchase, these historic bonds still represent an important part of the American savings bond legacy.

Many of them have matured, but some investors may still hold and redeem these bonds, as long as they are within the maturity limits.

Series EE bonds

Series EE bonds are popular for their security and guarantee of doubling the face value in 20 years.

These bonds are sold at face value and accumulate interest until maturity, with a government-backed guarantee to double their original value in two decades.

If the bond is held longer, it will continue to accumulate interest up to 30 years. Series EE bonds’ interest is based on a fixed rate set at purchase, making them ideal for those seeking predictable returns.

These bonds are suitable for long-term investors who want a guaranteed reserve value and steady growth, with the added security of a final guaranteed value.

Series I bonds

Series I bonds are popular for their protection against inflation and security, as they adjust the interest rate to inflation, combining a fixed and a variable rate to help safeguard the purchasing power of the invested money.

These bonds are especially beneficial in times of inflation, as they help maintain the real value of the investment over time.

Are savings bonds still worth buying?

Savings bonds remain a viable option for investors seeking safety and stability, despite their relatively low returns compared to other investment options.

With a typically modest but predictable interest rate, savings bonds are best suited for conservative investors and those looking to protect their capital rather than pursue rapid or aggressive returns.

Additionally, savings bonds offer tax advantages, such as the possibility of state and local tax exemptions on interest, making them attractive to those seeking tax efficiency.

In times of moderate or unstable inflation, Series I bonds are particularly useful for preserving the value of money over time.

How to redeem savings bonds

Redeeming savings bonds is a relatively simple process and can be done online through TreasuryDirect.

However, it’s important to remember that bonds can only be redeemed at least one year after issuance, and early redemption within five years will result in a three-month interest penalty.

To initiate the redemption process, the holder needs to access TreasuryDirect and follow the redemption instructions.

For financial savings bonds still in circulation, the redemption process can be carried out at an authorized financial institution.

It’s essential to ensure all bond ownership documents are up-to-date to avoid redemption issues.

How to calculate savings bond value

To calculate the current value of a savings bond, you can use the official tool offered by the U.S. government, the Savings Bond Calculator.

This tool allows the investor to enter information such as bond series, issue date, and face value to obtain the current value accurately.

This calculation is helpful for those who want to know their investment’s current value without waiting for maturity.

The calculator uses updated interest rate information, allowing the holder to make precise specifications about the bond’s final yield.

This is especially useful for those planning to redeem the bond at a specific time and want to ensure maximum return.

How long do U.S. savings bonds take to mature?

The time for U.S. savings bonds to mature depends on the type of bond purchased. Series EE bonds have a maturity period of up to 30 years, with a guarantee to double the face value in 20 years.

Series I bond also have maturity of up to 30 years, but their value is adjusted without a specific value guarantee, depending on inflation.

Investors can choose to hold the bond for the entire maturation period or redeem it early. However, to maximize returns, it’s generally more advantageous to hold bonds until maturity.

This longer term allows interest to compound, resulting in more significant growth in the bond’s final value.

Savings bonds represent a secure and advantageous investment option for those seeking stability and inflation protection.

Although returns may be lower than other investments, the federal guarantee and tax advantages make them ideal for long-term goals.

With options like Series EE and Series I bond, investors can find a balance between predictability and inflation adjustment, depending on their needs.

If you’re looking to diversify your savings or protect your funds from inflation, consider savings bonds. For more information and yield calculation tools, keep up with our articles to continue making informed financial decisions.

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