How a US savings bond works

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As record-high inflation and volatile markets hit the U.S. economy, families and retirees are looking for safer avenues to invest their money.

Starting in the 1930s under President Franklin D Roosevelt, government bonds were issued after the financial collapse of the Great Depression to incentivize Americans to save money in government-backed investments. When America entered World War II, Series E Bonds, or defense bonds, were used to finance the rapid industrialization of America's war effort. 

After the war, families bought saving bonds, hoping they would gain in value over time, using the money to help buy a house or eventually retire. As of 2012, paper savings bonds were no longer issued by the Treasury Department and became exclusively available via online purchases or electronic forms.  

What is a savings bond?

The federal government guarantees savings bonds with "full faith and credit." The public funds raised from these investments are used to fund federal spending and projects used to manage the country's economy. The bonds are loans the government takes out from the public, which it promises to pay back at a certain date. Moreover, the government pays interest to bondholders after selling the investments. 

Savings bonds are issued by the Treasury Department in order to publicly fund federal projects.  (AP Newsroom / AP Newsroom)

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The revenue from bonds is not subject to state or local income taxes – only federal. 

I Bonds and Series Bonds are the two most common types of saving bonds people buy. The interest for both bonds is compounded semiannually while the gaining interest is monthly at a variable rate. An individual receives their accrued interest when they redeem the bonds. 

The Treasury Department releases the fix interest rate for Series EE bonds every May and November.  (iStock / iStock)

How do I buy it?

Savings bonds can be purchased, tracked, changed registration, and redeemed online via the TreasuryDirect website. Physical copies certifying the investment are no longer available and are only found online. Other programs, such as the SmarExchangeSM, give bondholders the ability to convert their investments into electronic securities. 

If you do not cash a savings bond when it reaches its full maturity then you risk losing value from rising inflation.  (Justin Sullivan/Getty Images / Getty Images)

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These bonds are usually sold at face value, meaning a bond purchased for $50 will cost you $50 on which you earn the interest. Additionally, other bonds mature at different rates, such as Series EE savings bonds which take 20 years to reach their total value and are sold at 50% of their fave value. 

How long does it take for a savings bond to mature?

Series EE bonds also have a fixed interest rate for all of their life. The US Treasury Department sets the rate for new bonds every May and November. The current annual interest is 0.1% for bonds purchased in November 2021. 

These bonds reach their full maturity in 30 years. After the set date, the bond will no longer gain any interest; therefore, digital bonds are automatically cashed to the holder when the 30-year mark is reached. Individuals who purchased their bonds with paper before 2012 do not have to cash them automatically. However, bondholders risk losing the value of their bond due to inflation the longer they wait to cash them after maturity. 

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