How Do Savings Bonds Work?

How Do Savings Bonds Work?
••• savings bonds image by Stephen VanHorn from

Background Information

Because savings bonds are backed by the U.S. government, they are considered to be one of the safest ways of investing your hard-earned money. There are two different types of savings bonds. EE savings bonds were put into place in 1980. They are the paper type of bond that most people are familiar with. The I savings bonds are newer and somewhat different from EE bonds.

Purchasing a Savings Bond

Savings bonds in general can be bought at any banking institution, credit union or even online at a government Treasury website. They are extremely easy to buy because they are affordable. EE savings bonds can be bought at only half the value of their denomination, which makes it a long-term investment. Savings bonds can be bought at as little as $25 or as much as $10,000. For example, if you buy an EE savings bond of $50, you will pay $25 for that particular bond. Each person who purchases savings bonds can do so up to a total amount of $30,000 each year, or a $60,000 face value. The best thing about EE savings bonds is that they are completely safe and secure. They can be replaced if they are stolen, lost or destroyed as long as they have not been cashed or it is proven that they were cashed by the wrong person.

Interest Rates and Redemption Rules

Considered to be a market-based investment, the interest rates that are paid on savings bonds vary over time if bought before 2005. If you bought them after 2005, they earn a fixed rate of return, so you always know what the bonds are worth at any given time. They are based on a five-year treasury security yield, which means that you should get your money back in full on the bond in only five years if bought before 2005, but after, they guarantee that it will return your investment within 20 years even if the interest rates were extremely low. If you redeem them within the first five years of purchase, then you forfeit the three most recent months of interest, but after the five years is over, you are not penalized.

EE Savings Bonds Versus I Savings Bonds

The way that I bonds vary from EE bonds is that they are bought only at face value, which makes it a quicker investment. You earn a fixed rate of return combined with a semi-annual inflation rate. I bonds are also penalized if redeemed within the first five years. Typically, the I bonds mature faster because of interest rates, but that depends on the economy at the time of purchasing and redeeming. One last difference is that I bonds are only valued up to $5,000.