U.S. Savings Bonds

Definition

U.S. Savings Bonds are government-issued and -backed debt securities. They are considered a safe investment as they are guaranteed by the U.S. government. These bonds are issued in various denominations, and they earn interest over time.

Phonetic

The phonetics for “U.S. Savings Bonds” would be “yoo-ess sey-vingz bondz”.

Key Takeaways

<ol><li>U.S. Savings Bonds are considered a safe investment &mdash; They are backed by the full faith and credit of the U.S. government. Hence, even if the economy suffers, the U.S. government guarantees the payment of the principal amount plus the earned interest.</li><li>U.S. Savings Bonds are non-transferable &mdash; This means once they are issued, they cannot be sold or transferred to another party. They are registered to a specific owner or owners and only that person or persons can cash in the bond.</li><li>U.S. Savings Bonds accrue interest &mdash; These bonds accrue interest up to 30 years. They come in two types: Series EE and Series I. Series EE bonds are bought for half of the face value and are guaranteed to at least double in value over 20 years. Series I bonds are inflation-protected, meaning the interest rate combines a fixed rate with an inflation rate.</li></ol>

Importance

U.S. Savings Bonds are an important financial instrument primarily because they are a safe and secure way to save and invest money. They are backed by the full faith and credit of the U.S. government, making them virtually risk-free. They can also be bought in various denominations, from as low as $25, making them accessible to many investors. Moreover, the interest earned from these bonds is often exempt from state and local taxes, and federal taxes can be deferred until redemption, providing significant tax benefits. Finally, their fixed rate of return guarantees investors know exactly what they will receive in the future, contributing to financial predictability and stability.

Explanation

U.S. Savings Bonds serve as a secure and low-risk investment instrument primarily issued by the U.S. Department of the Treasury. These bonds act as a significant vehicle for individual and public investors to lend money to the federal government for a specified period, which aids the government in financing its borrowing needs. They are considered highly reliable because they are backed by the full faith and credit of the U.S. government.The purpose of U.S. Savings Bonds is twofold. For investors, they present an opportunity to invest their money over a long period, and in return, earn interest. Unlike other bonds, savings bonds are non-marketable, which means they can’t be sold to other investors and must be held until maturity unless redeemed early. They also offer benefits such as exemption from local and state income taxes. For the federal government, issuing these bonds presents a consistent stream of funds which is used for various public expenditures such as infrastructure development, military spending, or payment of public debt.

Examples

1. First Example: John Doe is a new parent and decides to invest in his child’s future education. He purchases a U.S. savings bond to ensure there will be funds available when his child reaches college age. Over the years, this investment will accrue interest, growing the initial amount John invested and securing a sum for his child’s academic future.2. Second Example: A small business named “ABC Enterprises” wants to create a company-wide employee incentive. It decides to reward its employees with U.S. savings bonds to encourage long term investment and financial stability among its workforce. The company buys bonds in the employees’ names, which after a determined period will mature, providing the employees with a return on this investment.3. Third Example: A senior citizen, Mrs. Smith, is looking to supplement her retirement funds. She chooses to invest a portion of her savings in U.S. savings bonds for their low-risk nature and guaranteed return. Over time, the bonds mature and yield profits, providing Mrs. Smith with an additional source of income during her retirement years.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Series EE Bonds
• Series I Bonds
• Interest rates
• Non-marketable securities
• Maturity date

Sources for More Information

• TreasuryDirect
• Investopedia
• U.S. Securities and Exchange Commission
• The Balance