U.S. Savings Bonds
U.S. savings bonds refer to securities from the U.S. federal government for attracting public funds to help pay for the government’s needs. By issuing bonds, the state borrows money and then returns it with interest — in the case of bonds, they are called coupons. U.S. savings bonds are a type of bonds that do not pay interest during the life of the bonds. In fact, the interest is paid when the security comes due.
U.S. Savings Bonds explained
U.S. savings bonds are a type of a security in the U.S. The U.S. government resorts to issuing and selling bonds when it needs finances to start new projects, keep its economic operations within a reasonable range or refinance old debts. U.S. savings bonds belong to debt securities. It means that the issuers must repay the debt and pay interest within the specified period. When purchasing a bond, the owner can expect to receive interest (coupon) — this is a part of the income that the issuer pays to bondholders.
Bonds constitute an asset class that is exempt from taxation. Besides, they can’t be transferred from one person to the next.
Guide to history of U.S. Savings Bonds
The economic policy that was implemented since 1933 and intended to overcome the large-scale economic crisis (the Great Depression) that engulfed the United States in 1929-1933, included the issue of savings bonds, Series A . The Series E securities referred to assets that were offered to finance military operations from 1941 to 1945.
After the war, the savings bonds were promoted in all possible ways. The main arguments were that bondholders had the opportunity to get the profit earned on an investment and that these investments were low-risk.
Characteristics of U.S. Savings Bonds
Issuer of the U.S. savings bonds is the U.S. federal government, it means that an investor can buy a security only from the government. Besides, it can’t be sold to another person and transferred to another individual as the rules governing the issuance of bonds prohibit it. This ensures that the price of the bond is fixed and cannot be adjusted for any reason. That’s why the bondholder can be sure that he will get return on investments. In addition to this, if an investor lost or destroyed a security, the government would reissue or replace it.
A person can purchase savings bonds in penny increments, from $25 up to $10,000 per year. TreasuryDirect is a website that allows citizens of the U.S. to purchase securities. One of the advantages of buying through TreasuryDirect is that it "stores" the bonds. An investor just has to open an account and specify a Social Security Number (SSN), a checking or savings account, as well as an email address.
Such bonds are zero-coupon bonds that do not make periodic interest payments. In this case, the investor receives income due to the fact that the bond is purchased cheaper than the nominal value when the bond comes due. The coupon rate on the bonds is paid twice a year, the last coupon and the amount equal to the nominal value of the bond are paid when the bond comes due (they mature fully after 30 years). The accrued amount of interest will be transferred at the maturity date of the investment to the bank account of the bondholder.
The circulation period of bonds varies. Usually bonds are issued for a limited period of time - most often from 15 to 30 years. Bonds should be redeemed after 12 months for an investor to get face value and interest. During the first five years, bondholders can also cash savings bonds, however the interest earned during the three months prior to cashing will be lost. If an investor redeems a security after five years, no penalties will be imposed on him.
Interest income from savings bonds is not subject to state and local income taxes. Despite this fact, it is not exempt from federal tax, which is imposed in the year in which the security reaches maturity or when the bond stops to accrue interest. If the interest earned is used for educational purposes, it is subject to lower taxes.
Types of U.S. Savings Bonds
Nowadays there are two series of U.S. savings bonds that are offered in electronic form — EE bonds and I bonds.
Series EE bonds. They replaced the E-series bonds, which were issued from 1941 to 1980. Such securities have a fixed rate of interest, which is determined on the date of purchase. When the Series EE savings bond comes due, an investor receives the interest accrued plus the full value of the bond.
Series I bonds. This type of security gained its popularity in 1998. Assets can only be purchased at face value. An interest adjusted for the effects of inflation is accrued on the Series I bonds, meaning that the interest rate can fluctuate. If the inflation rate accelerates, the interest rate will be moved higher. If there are apparent risks of deflation, interest rate on Series I savings bonds will not be below 0.00%.