Q:

How do savings bonds work?

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Quick Answer

Modern U. S. savings bonds are essentially a loan from purchasers to the U. S. government. They are purchased online at face value through the U. S. Department of the Treasury and accrue annual interest for up to 30 years until they are cashed in. Bonds may be cashed in as soon as six months after purchase, but bonds cashed in early are penalized the last three months' worth of interest.

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How do savings bonds work?
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Full Answer

The two types of savings bonds, the EE and the I, differ primarily in how interest is calculated. The EE earns a rate based on 5-year Treasury security yields, while the I earns a variable rate indexed to inflation. Both are available for purchase online at Treasury Direct, a government website. Bonds purchased today are electronic-only. According to Susan Tompor at USA Today, the Department of the Treasury ceased issuing paper bonds in 2012.

Savings bonds often earn low interest relative to other securities, but that does not necessarily mean they are worthless. The Internal Revenue Service explains in its Publication 970 that Series EE and I savings bonds can be used as tax-free savings instruments for certain college expenses, including tuition and fees. Dorothy Rosen at Bankrate.com adds that interest earned on U. S. savings bonds is exempt from state and local tax in all cases, and even federal tax is deferred until the bond is cashed in.

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Related Questions

  • Q:

    Can lost government bonds be replaced?

    A:

    If government bonds are lost, owners can request substitute electronic savings bonds from TreasuryDirect, but these are not issued in paper form. Alternatively, owners can ask for cash for their lost bonds, according to TreasuryDirect.

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  • Q:

    How does the government determine the interest rates for Series EE bonds?

    A:

    The government sets interest rates for EE bonds based on 10-year treasury note yields but adjusts these rates to account for factors unique to savings bonds, states TreasuryDirect. Bonds purchased between May 1, 2015 and Oct. 1, 2015 are subject to a 0.30 percent annual interest rate.

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  • Q:

    How do you cash U.S. savings bonds?

    A:

    As of 2015, Investors redeem electronic savings bonds through TreasuryDirect, but they can only redeem paper savings bond at certain local banks and financial institutions or by mailing them to the Treasury Retail Securities Site. Electronic bonds redeemed online are transferred to a person's checking or savings account, explains TreasuryDirect.

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  • Q:

    What is a TreasuryDirect savings bond?

    A:

    TreasuryDirect savings bonds are electronic versions of traditional U.S. savings bonds. The U.S. Treasury stopped issuing paper savings bonds in 2012. Managed by the Bureau of Fiscal Affairs, TreasuryDirect.gov sells and stores electronic savings bonds.

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