Savings Bond
Definition
A savings bond is a government-issued debt security that earns interest over a fixed period, making it a low-risk investment.
Detailed Explanation
Savings bonds are debt securities issued by the government to fund various public expenditures and are considered one of the safest forms of investment because they are backed by the full faith and credit of the issuing government.
They are designed to pay interest for a specific number of years until they reach maturity. Interest on savings bonds is typically compounded semi-annually and is paid when the bond is redeemed. Savings bonds are non-marketable, meaning they cannot be sold in the secondary financial markets, which ensures that they are a stable and predictable form of investment. They are often purchased for long-term financial goals such as education, retirement, or as gifts, especially for children.
In the United States, popular types include Series EE and Series I bonds, each offering distinct interest earning methods and terms. Series EE bonds are sold at face value and double in value by their 20-year maturity, while Series I bonds offer a fixed interest rate plus an inflation-adjusted rate.
Example
Mary purchases a $1,000 Series EE U.S. Savings Bond for her newborn niece. The bond is guaranteed to double in value over 20 years, and Mary plans to give it to her niece when she goes to college.
Key Articles Related To Savings Bonds
Related Terms
Compound Interest: Interest calculated on the initial principal and also on the accumulated interest of previous periods of a deposit or loan.
Debt Security: A financial instrument representing money borrowed that must be repaid, typically with interest.
Maturity: The date on which the principal amount of a bond, certificate of deposit (CD), loan, or other financial instrument becomes due and is repaid.
Treasury: The government department responsible for managing all financial services of the government, including issuing bonds and other securities.
FAQs
How do I buy a savings bond?
In the United States, savings bonds can be purchased online through the TreasuryDirect website, which is managed by the U.S. Department of the Treasury.
Are savings bonds a good investment?
Savings bonds are a low-risk investment suitable for long-term goals, providing a safe way to save while earning interest, though they may offer lower returns compared to higher-risk investments.
Can I cash in a savings bond before it matures?
Yes, savings bonds can typically be cashed in after one year, but cashing them in before five years results in a penalty of the last three months’ interest.
Editor: Colin Graves