Savings Bonds

Savings bonds are debt instruments issued by the government. While a savings bond is considered a safe investment, it offers a very low rate of interest as compared to other investment options, such as equities.

The US Department of the Treasury issues savings bonds. The interest rates offered on such bonds are subject to change every May and November, based on the current market rates and/or inflation.
Saving Bonds: Procedure

US savings bonds can be acquired from commercial banks, most of which act as agents for the Treasury. They can also be purchased through your employer (through payroll deductions) and over the Internet. A savings bond may be registered in the name of a single person, two people or a primary owner and a beneficiary. These are known as single ownership, co-ownership and beneficiary savings bonds, respectively. At the time of maturity, savings bonds can be redeemed at various banks or any of the branches of the Federal Reserve.

It is important to keep a record of the serial numbers, issue dates and denominations of the savings bonds in case they are lost, stolen or accidentally destroyed. This information will need to be submitted to the Department of the Treasury to ensurethat your bonds are replaced.
Types of Savings Bonds

The two main types of savings bonds are:

Series EE bonds: These savings bonds have a 30-year maturity period. Series EE bonds are typically sold at half their parvalue. While they are guaranteed to become worth their face value by the end of the term, this may happen much earlier, following which they continue to gain value. The principal is repaid, along with the interest, as a lump sum at the end of the term.

Series I bonds: These savings bonds are sold at their par value. They offer a fixed interest rate and an inflation premium. Series I bonds are designed for hedging inflation, with the premium protecting the purchasing power of the principal.
Advantages of Savings Bonds

The advantages of savings bonds are:

    * Offer a higher interest rate than savings accounts.

    * Absolute relief from local and state taxes.

    * Nominal level of initial capital investment.

    * Freedom from paying commission to brokers.

    * Assured returns and no threat from a turbulent market.

Drawbacks of Savings Bonds

The drawbacks of savings bonds are:

    * An investor receives only fixed interest on the capital invested. There is no option of capital gains from market swings.

    * Low interest rate as compared to other investment options.

    * Non transferable and do not have the status of an interest bearing security.

    * Cannot be offered as collateral when applying for loans.

    * Not liquid and do not have a secondary market.

Since the interest rates are typically low on savings bonds, they are a good investment option only for the medium term. Savings bonds are typically not favored by investors with longer horizons (more than twenty years).