Savings bonds

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Savings Bond

In the United States, a non-tradable bond issued by the federal government for savings purposes. A savings bond allows citizens to receive a guaranteed return for their investments and helps raise revenue for the government. There are two types of savings bond in the United States: Series EE and Series I, with the main difference being that Series I bonds have interest rates indexed to inflation. Savings bonds pay coupons semi-annually; they are sold at face value and pay par upon maturity, which is 30 years after purchase. Bonds not held for at least five years are subject to a redemption penalty. Federal taxes on interest are deferred until redemption or maturity. Savings bonds are non-transferable and must be either held or redeemed.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

Savings bonds.

The US government issues two types of savings bonds: Series EE and Series I.

You buy electronic Series EE bonds through a Treasury Direct account for face value and paper Series EE for half their face value. You earn a fixed rate of interest for the 30-year term of these bonds, and they are guaranteed to double in value in 20 years. Series EE bonds issued before May 2005 earn interest at variable rates set twice a year.

Series I bonds are sold at face value and earn a real rate of return that's guaranteed to exceed the rate of inflation during the term of the bond. Existing Series HH bonds earn interest to maturity, but no new Series HH bonds are being issued.

The biggest difference between savings bonds and US Treasury issues is that there's no secondary market for savings bonds since they cannot be traded among investors. You buy them in your own name or as a gift for someone else and redeem them by turning them back to the government, usually through a bank or other financial intermediary.

The interest on US savings bonds is exempt from state and local taxes and is federally tax deferred until the bonds are cashed in. At that point, the interest may be tax exempt if you use the bond proceeds to pay qualified higher education expenses, provided that your adjusted gross income (AGI) falls in the range set by federal guidelines and you meet the other conditions to qualify.

Dictionary of Financial Terms. Copyright © 2008 Lightbulb Press, Inc. All Rights Reserved.
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