What Are Savings Bonds And How Do They Work

During the great depression in 1935, the former President of the United States, Franklin Roosevelt, signed the legislation that allowed the Department of Treasury to raise funds from the public. These funds were to be raised through a Federally backed savings bonds Series A, and they were used to keep the government running.

In 1941, the Series E bond was issued to raise money to fund World War 2, and they were called Defence Bonds. However, after the attack on Pearl Harbor, they were called “War Savings Bonds” because all the money invested in them went directly towards funding the war.

Simply put, savings bonds are mostly an IOU from the government. When you purchase a savings bond, you are granting the government a loan. When the bond is redeemed, the government pays you back with interest. Savings bonds are debt securities issued by the U.S. Department of the Treasury to help pay for the U.S. government’s borrowing needs. U.S. savings bonds are considered one of the safest investments because they are backed by the full faith and credit of the U.S. government. 

Before now, savings bonds were in the form of papers with serial numbers that you could purchase at a bank or through the mail. 

Today, you need to get them online. That is a significant development, because before you could purchase paper savings bonds in predetermined values. Presently, you can do it in penny increments.

Types of Savings Bonds

To buy or redeem U.S. savings bonds, you must be a U.S. resident, official U.S. citizen, or U.S. government employee (irrespective of your citizenship status).

Series EE Savings Bonds AKA Patriot Bonds

These types of bonds are issued at face value. What you see is what you get. If it’s worth $100, you will not pay more than $100. On redemption, it’s worth its full value and with interest paid electronically. You may not purchase more than $10,000 worth in one calendar year.

Series I Savings Bonds

Series I savings bonds are longer-term in tenure than Series EE. When you redeem the bond, you get back the full face value of your investment and interest. 

Although they are sold at face value and have a maximum of $10,000 you can purchase in a calendar year, the Series I savings bonds are inflations-indexed. In other words, they offer a fixed rate of interest adjusted for inflation. If the inflation rate increases, the interest rates are adjusted upwards. If there is deflation, the bonds are ensured never to dip under 0.00%. 

Series HH Bonds

These bonds are no longer available for purchase. The government discontinued them in 2004. Bonds that did not mature kept on accruing interest installments. The Series HH bonds were 20-year, non-marketable savings bonds issued by the U.S. government.

These savings bonds are among the safest types of investment. They are risk-free because the federal government backs them. The interest in these bonds is not high compared with the stock market, but they offer you less risky income. 

Savings bonds are a way of saving for future expenses since you can redeem them until a minimum of 12 months after purchase. The longer your patience, the more your interest accrues on these savings bonds.

Savings Bonds as a Safe Haven

With such significant volatility in the stock market, investors search for a haven to put away their cash. What’s more, nothing signals stability and security like savings bonds. Backed by the U.S. government’s full faith, savings bonds offer an amazingly safe way to save and build money for the future.

Savings bonds lead to an increase in National debt because they are loans from the citizens to the government for the most part. The more citizens subscribe to these bonds, the better for the government. These funds are mostly used to fund the government in times of financial crises.

How Savings Bonds Work

It’s a Creditor Debtor Relationship.

It works like a loan. When you take a loan from a lending institution, your interest rate will accrue on the balance until you pay off the loan. The longer you take to pay off the loan, the more you will pay due to accrued interest.

That is how savings bonds work. The difference this time is the roles are reversed. You are the lender who is granting the loan to the government, and you can ask the government to pay back any time.

U.S. bonds are the safest investment in the world because The Treasury backs them. Additionally, they are often considered low-interest returns. However, you will never lose your principal investment.

How and Where to Buy Savings Bonds

Previously savings bonds were issued like pieces of paper in the shape of currencies and looking like certificates. Those days are behind us now.

Today you can purchase savings bonds from Treasury Direct, the U.S.Treasury electronic saving platform. However, suppose you still desire the paper certificates. In that case, you can go for Series I, which can be issued to you using your IRS Tax Refunds.

The process of buying savings bonds is quite simple. Select between $25 and $10,000. Next, you choose the time of bond you wish to buy, either Series EE or Series I. Note that Series I is limited to $5,000. 

You will only pay half the value of the bond you wish to buy. That is, you pay $100 for a $200 bond. Next is you choose how long you want to hold the bond for, and that could be between 12 months and 30 years.

To enjoy a full return on your investment with interest, you have to wait for the entire term of the bond, 20 or 30 years. Although you can cash in your bond earlier, your returns will be based on a maturation schedule that rises over the bond’s life. Maturation for Series EE is 20 years, while Series I bonds have no guaranteed value on maturity. Remember, both types reach the maximum value at 30 years.

The interest that accumulates over the term of a savings bonds depends on the type. The Treasury changes bond rates on Series EE securities in May and November every year. For instance, a Series EE security has a fixed financing cost of 0.1%. A Series I Bond has a rate of 1.06%, which will adjust for inflation at regular intervals of 6 months. These rates can be competitive to high-yield saving accounts lately. The two rates are current until they experience their next adjustment.

Calculating Interest on Savings Bonds

Calculating interest on savings bonds

You can use the Treasury Direct savings bonds calculator to know your bond’s value at any point in time. All you need is the bond series, face value, and serial number, as well as the issue date. Impute these details accordingly, and it will bring out the current value of your bond.

If you purchased a $50 Series EE earlier in May 2000, you would have paid $25 for it. The Treasury promised to pay back the face value plus interest on maturity, which would have brought the value to $53,08 in May 2020. A $50 bond purchased 30 years ago for $25 would be valued at $103.68 today.

Here’s a table with calculations based on past interest rates. Prevailing rates may vary.

Face ValueAmount Paid20 Year Maturity Value30 Year Maturity Value

How to Redeem Your Savings Bonds

After 12 months, you can cash in your savings bonds electronically by logging into your account on the Treasury Direct website. Check the current value on the “Current Holding” tab, and follow the instructions on-site to redeem your funds. Your funds will be credited to your account within 48 business hours.

Suppose you have paper bonds, like the Series EE, I, and older Series E bonds, which were discontinued in 1980 and no longer accrue interest. In that case, you can cash them at any bank branch. Series HH paper bonds that were discontinued in 2004 will continue to accrue interest until 2024. These types can only be cashed by mailing them to the U.S. Treasury Department.

Are Savings Bonds Worth It?

Are Savings Bonds Worth It?

Savings bonds are safe havens, risk-free, and backed by the government. However, the interest in them is low, sometimes not more than 3.5%. With savings bonds, you know you can never lose. The government always pays.

These questions then follow: Can you hold a bond for 20 to 30 years, are there other risk-free investments that can guarantee your principal and pay more than 3.5%?

These are questions you need to think about carefully and answer. It would not be a bad idea to seek the advice of a professional to guide your decision.

Features of Savings Bonds

Non – Transferable

The U.S. Savings bonds are non-transferable and non-marketable in nature. You can only purchase them from the Treasury Direct website and can not resell them to anyone. It is a contract between you as an individual and the government. The Treasury department can reissue lost and damaged paper certificates.

Quantity Limitations

You can buy the savings bonds in penny increments starting at a minimum of $25 to a maximum value of $10,000 per individual in one calendar year.

You can only buy and redeem savings bonds on the U.S. government’s Treasury Direct website. 


The investor must open a TreasuryDirect account and provide a Social Security Number (SSN), checking or savings account, and email address.

How Interest is Paid

Savings bonds are zero-coupon bonds. They do not pay interest until redemption or maturity date. Interest on savings bonds compound semi-annually and accrues every year for 30 years.

After 30 years, your savings bonds cease to generate interest for you. If you purchased your bonds at the end of the month, you are still entitled to the interest for the whole month in question. 

Rules of Early Redemption

The time it takes for a bond to mature differs. However, it is regularly somewhere in the range of 15 and 30 years. A bondholder must wait at least a year after buying before redeeming the bonds. On redemption, you will receive the face value plus interest.

Investors who redeem their bonds within the first five years of buying will forfeit the accrued interest for the last three months as a penalty. However, redemption after five years attracts no penalty.

Tax Implications

The interest earned from savings bonds is excluded from state and local taxes. Notwithstanding, federal taxes apply but only in the year in which the bond matures, is redeemed, or after 30 years, when the bond stops earning interest.

Suppose the proceeds of the savings bonds go to paying tuition fees for higher education. In that case, it may be exempted from paying higher taxes.

Ultimately the decision to invest in savings bonds depends mostly on your patience and the level of risk you are willing to take on. Savings bonds are safe, risk-free, and backed by the government, but the returns are low. This is why parents and guardians prefer to buy it for their kids and hope the value will be worth it when they come of age.

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