Penalty for Selling a Bond Early

You can choose to sell almost any bond on a secondary market before maturity. While you may lose money, you do not incur a penalty. You can also choose to exchange a U.S. savings bond before maturity, and in a few cases of very early exchanges you may have interest docked as a penalty.

A bond is a debt security. When you buy a bond directly from the issuer, you lend the issuer money -- called your "principal" -- and the issuer promises to pay the principal back on the maturity date and to also pay you interest periodically until the bond matures. All bonds except U.S. savings bonds can be resold on secondary bond markets where prices fluctuate considerably.

The bond issuer cannot penalize you for selling a bond on a secondary market before the bond matures. In fact, that is what most bond traders do: buy and sell on secondary markets. You can, however, lose money by selling on secondary markets. If interest rates have gone up, the issuer looks like it might default or if inflation has gone up, your bond almost definitely sells for less than what you originally paid for it.

Savings bonds cannot be bought or sold on secondary markets; investors must buy directly from the U.S. Treasury and redeem them with the Treasury. While you cannot sell a savings bond before maturity, you can exchange it. Because no secondary market exists, you cannot lose money on savings bonds.

If you decide to exchange your savings bond very early, you will be penalized. Savings bonds come with a maturity of 30 years and earn interest every 6 months. You must hold your savings bond for at least a year -- 12 months -- before exchange. If you exchange after one year but within five years, the Treasury deducts the last three months' worth of interest -- in other words, half an interest payment -- as a penalty for early exchange. After five years -- 60 months -- there is no penalty for exchanging the bond before maturity.