What are Savings Bonds?

The United States established savings bonds, known then as "war bonds," in 1941 to help to pay for the huge expenses it incurred during World War II. Today, savings bonds still help keep the government wheels running smoothly. Savings bonds are a debt instrument of the U.S. Government, issued as savings certificates to individual investors in small amounts. Savings bond certificates bear face value denominations ranging from $50 to $10,000. Since they are backed by the full faith and credit of the Federal Government, savings bonds are among the safest investments people can find.

The U.S. Government is unlikely to default; and even if you lose your savings bond certificate, the Government will often replace it, especially if you can provide such information as the serial number, issuance date, address and Social Security number of the owner. Another major advantage of savings bonds is that they are an accessible investment for almost anyone, since you can buy savings bonds in amounts as low as $25. For instance, you can buy a $50 Series EE bond for $25, and at maturity you can redeem it for $50. As a result, savings bonds still make good gifts for children planning to attend a college or technical school. That is not all. Savings bonds have at least two more advantages. They can provide a tax shelter; for instance, you would not pay income tax on the earnings of Series EE bonds until you redeemed the bonds. In addition, savings bonds are easy to acquire from a variety of resources. Besides being extremely easy to acquire, a savings bond offers another attractive purchasing feature: no seller's fees. Unlike stock purchases, there are no fees or commissions that add to the purchase price.

Where do you buy Savings bonds? Savings bonds are sometimes available through a payroll deduction plan at work. Also you could purchase them at a variety of government offices and financial institutions: Banks, Credit Unions, Federal Reserve banks and branches – by phone or mail only (The Federal Reserve no longer provides a walk-in service), and the Bureau of Public Debt.

Anyone who bought or received a savings bond before 1980, they owned a Series E or Series H savings bond. That year, Series EE and Series HH bonds replaced the original series. The two current series offer a different maturity and interest rate. In 1998, the U.S. Government introduced inflation-indexed Series I bonds. The U.S. Government issues Series EE bonds at one-half their face value, which ranges from $50 to $10,000. At maturity, you can redeem the bonds at their face value. You may buy up to a face value maximum of $30,000 in Series EE bonds annually. Series EE bonds earn interest for 30 years. Series HH bonds earn interest for 20 years. You can acquire Series HH bonds only through an exchange of your Series E or Series EE bonds. A minimum acquisition is $500. Other denominations issued are $1,000, $5,000, and $10,000. Unlike Series EE bonds, you purchase Series HH bonds at their full face value and thereafter receive regular interest payments. Series I bonds also are sold at their full face value, beginning with a minimum denomination of $50. Other denominations are $75, $100, $200, $500, $1,000, $5,000, and $10,000. Like Series EE bonds, you receive the interest earned when you cash the bond. I bonds earn interest for 30 years.

The current rate on Series EE bonds is 2.61 percent interest, through April 2004. New interest rates are announced twice a year and take effect May 1 and November 1. If held for five years, Series EE bonds pay 90 percent of the six-month average yield on five-year Treasury securities. Earnings vary for Series EE bonds issued from 1980 to 1997. Many Series E bonds have stopped paying interest. You receive the interest earned along with your principal when you cash in the bond. Series HH bonds pay a fixed rate of interest from the date you purchase the bonds. In August 2004 it will be the last issue month for HH/H bonds. After August 31, 2004, no one will be able to reinvest on HH/H or exchange their EE/E bonds for HH bonds. Series I bonds bought from May 1, 2003 through October 30, 2003