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U.S. Savings Bonds?:Types of U.S. Savings Bonds

United States Savings Bonds are debt securities issued by the United States Department of the Treasury to help pay for the borrowing needs of the United States government. US Savings Bonds are considered one of the safest investments because they are backed by the full faith and credit of the United States government. Savings bonds are non – marketable treasury securities issued to the public, which means they cannot be traded on the secondary markets or otherwise transferred. They are redeemable only by the original purchaser or a beneficiary in the event of death.

Series E bonds, known as defense bonds, were a major source of financing in the period just before the United States’ entry into World War II. On April 30, 1941, Roosevelt purchased the first Series E bond from Secretary of the Treasury Henry Morgenthau, Jr .; the next day, they were made available to the public. After the attack on Pearl Harbor, defense bonds became known as war bonds. Stamps featuring a Minuteman statue design in denominations of 10¢, 25¢, 50¢, $1, and $5 were also sold for collection in booklets that, when filled, can be redeemed for the purchase of bonds from the Series E that accrue interest. All proceeds received from the bonds went directly to support the war effort.

After the war ended, savings bonds became popular with families, with buyers hoping to redeem them so the bonds would increase in value. To help maintain post-war sales, they were advertised on television, in movies, and in commercials. When John F. Kennedy was president, he encouraged Americans to buy them, which stimulated a large enrollment in savings bonds. In 1976, President Ford helped celebrate the 35th anniversary of the US savings bond program.

In 1990, Congress created the Education Savings Bond Program that helped Americans finance a college education. A bond purchased on or after January 1, 1990, is tax-free (subject to income limitations) if used to pay tuition and fees at an eligible institution.

In 2002, the Treasury Department began to change the savings bond program by lowering interest rates and closing its marketing offices. As of January 1, 2012, financial institutions no longer sell paper savings bonds. That year, the Treasury Department’s Bureau of Public Debt made savings bonds available to purchase and redeem online. U.S. Savings Bonds are now only sold electronically on a Treasury Department website with the exception that paper Series I Savings Bonds can be purchased with a portion of a federal income tax refund using form 8888. 

Types of bonds

There are two types of savings bonds offered by the Treasury, Series EE and Series I.

EE series

$1,000 Series EE Savings Bond with Benjamin Franklin

Series EE bonds are guaranteed to double in value over the purchase price when they mature 20 years from issuance, though they continue to earn interest for a total of 30 years. Interest is accrued monthly and compounded semiannually, that is, it becomes part of the principal for future calculations of interest earnings. If a bond’s compound interest fails to meet the guaranteed doubling of the purchase price, the Treasury will make a one-time adjustment to the 20-year maturity value, giving it an effective rate of 3.5%. The bond will continue to earn the fixed rate for another 10 years. All interest is paid when the holder collects the bond.

For bonds issued before May 2005, the interest rate was an adjustable-rate recalculated every six months at 90% of the average five-year Treasury yield for the previous six months. Bonds issued in May 2005 or later pay a fixed interest rate over the life of the bond. Paper EE bonds, last sold in 2011, could be purchased for half their face value; For example, a $100 bond could be purchased for $50, but would only reach its full value of $100 at maturity.

Series I

Series I bonds have a variable yield based on inflation. The interest rate consists of two components. The first is a fixed rate that will remain constant during the life of the bond; the second component is a variable rate that adjusts every six months from the time the bond is purchased based on the current rate of inflation. The fixed rate is determined by the Department of the Treasury; the variable component is based on the the consumer price Index for urban areas (CPI-U) for a six-month period ending one month before the rate adjustment. The new rates are published on May 1 and November 1 of each year. In August, six months after the month of purchase, the inflation component will change to the rate published in May. During times of deflation, the negative inflation-indexed portion may reduce the blended rate below the fixed portion, but the blended rate cannot go below 0% and the bond cannot lose value. Like the Series EE bonds, interest accrues monthly and is compounded semi-annually. In addition to being available for purchase online, taxpayers can purchase Series I bonds using a portion of their tax refund through IRS Form 8888.

Common terms

For both types, the bonds can be redeemed after 12 months, but there is a penalty of three months of interest if they are redeemed before 5 years. Interest tax may be deferred until the bond is repaid. 

The annual purchase limit for Series EE and Series I electronic savings bonds is $10,000 for each series. For paper Series I savings bonds purchased through IRS tax refunds, the purchase limit is $5,000, which is in addition to the online purchase limit. 

HH-series

In addition, the Treasury previously offered Series HH bonds, which were “current income” bonds. Unlike the Series EE and I bonds, they did not increase in value but paid accrued interest every six months for 20 years directly to the holder. The interest rate on a Series HH bond was fixed at the time of purchase and remained so for 10 years. After 10 years, the rate could change, with the new rate for the remaining 10 years of the bond’s life. After 20 years, the bond would be redeemed for its original purchase price. Series HH bonds replaced series H bonds, which were introduced in 1952. Issuance of series HH bonds ended on August 31, 2004. Although no longer sold, the series HH bonds continue to earn interest for 20 years after the sale, meaning the last bonds won’t mature until 2024.