U.S. Savings Bonds are Convenient and Safe Investments

EE Savings Bonds and I Bonds, two well-known savings bonds issued by the U.S.Treasury, are convenient and safe investments for the retail investor. You do not need to be an experienced investor to understand how these bonds work. And you can invest as little as $25 to buy a EE Savings Bond and $50 to buy an I Bond.

EE Savings Bonds are sold at one-half of their face value at maturity. So you pay only $25 for a bond with a face value of $50 at maturity. The largest bond is worth $10,000 at maturity and costs you $5,000. You can buy EE bonds at many banks and credit unions, through payroll deduction programs and directly from the U.S. Treasury.

A EE Savings Bond purchased after June 2003 and before May 1, 2005 is guaranteed to reach face value in at least 20 years. It pays interest twice a year at a rate that is 90 percent of the six-month average of the five-year treasury yields. The interest rate is adjusted every May 1 and November 1. You may hold the bond up to 30 years and continue to receive interest. After that the bond stops paying interest so you should redeem it.

Any new series EE bond purchased after May 1, 2005 will have a fixed interest rate for the 20-year life of the bond. The rate will be close to the rate of 10-year U.S. Treasury securities.

An I bond is similar to the EE bond except that you pay full face value for the bond. So a $50 bond costs you $50. An I Bond pays you regular interest payments that reflect the level of inflation (The "I" in I Bond comes from the word Inflation) as measured by the consumer price index (CPI). So as inflation increases, you receive a higher interest rate. Or if inflation declines, you would receive less interest. An I Bond stops paying interest after 30 years.

Both bonds are sold in the following denominations (face value): $50, $75, $100, $200, $500, $1,000, $5,000, and $10,000. You can buy savings bonds at many banks and credit unions, through payroll deduction programs and directly from the U.S. Treasury.

Savings bonds can not be sold on a secondary market (they are not marketable) like other types of bonds. You may only redeem a savings bond for its current value. You must hold both types of bonds for 12 months. Then you may cash in the bond anytime. But if you cash in the bond before five years, you will lose three months of interest.

The tax considerations for both bonds include: All interest that you earn is 100 percent exempt from state and local taxes. But you must pay federal taxes on the interest. You may report the interest earned each year or wait and report it all at once when you redeem the bond. If you cash in a bond and use the proceeds for qualified educational expenses, you may be tax exempt from federal taxes on the accrued interest.

These bonds make good presents for children because they can be purchased in small denominations and can teach a child the importance of saving and investing.

Updated August 18, 2007.