US Bonds

U.S. Bonds: Pros and Cons

For every life milestone, you probably expect and look forward to gifts from close friends and family.  Whether it is a baby’s birth, a birthday, a wedding, a religious ceremony, or some other moment that warrants a gift, a U.S. savings bond is a great gift to give and receive.

U.S. bonds, formerly known as Liberty Bonds, came into being during World War I to fund the war and were used again nearly one hundred years later in the aftermath of the World Trade Center terrorist attacks to help finance the rebuilding.  Fundamentally, these bonds are loans from individuals to the federal government for a set period of time.  In this sense bonds are very similar to CDs, or ceritficates of deposit.  The government in return agrees to pay you, the lender, and an interest rate upon maturation.  Bonds are given to individuals with a Social Security number.  They are a contract between the government and the individual, promising that the government will pay the entire bond amount plus interest when the duration of maturity is over.  It may seem odd that the federal government needs to borrow money from individuals.  However, like banks, the government uses the money to payoff debt or for expenses, which is why they were so important during the Wars.

The Treasury Department, as of now, offers two types of bonds.  There are many minute details, but there are just a few main differences.  The EE bond is a bond that earns a fixed rate.  They are dispersed at 50% the face value (a $5,000 bond costs $2,500) and need twenty years to mature and earn interest monthly until the bond is cashed.

The other type of bond is the I bond.   The I bond earns a combination return of fixed rate and the inflation rate.  The CPI (Consumer Price Index) determines the latter and the former is fixed by the government.  Unlike the EE bond, the I bond is issued at face value (a $5000 bond costs $5000).   Nonetheless, both types of bonds have a limit of $5,000 per year per individual.

The greatest benefit of bonds is the guaranteed value and fixed rate.  In addition, the interest earned remains tax-free through the maturation process.  However, at the end of the maturation term, the IRS requires that all earning be shown.  Unlike CDs, a savings bond can be sold before the end of the 20 year period, which is a nice option should an emergency come up.  But, if sold before the first five years, a penalty is incurred.

There are a few downfalls to savings bonds to consider.  While bonds to carry a fixed rate, they, generally, are not as competitive as other investment options.  If a higher interest rate is desirable, it might be best to look into CDs or savings accounts.  In addition, a bond can be physically lost.  The bond is the contract and receipt of your investment.  Should it be lost, all of your money is lost, as well.  However, an easy way to avoid this is to purchase a fireproof safe deposit box.  Finally, bonds cannot be sold or transferred to another individual, except in the event of the bondholder’s death.

Purchase a bond as a gift in several denominations.  You can request either electronic or paper form.  U.S. savings bonds are a safe investment, backed fully by the federal government.  A bond will never be worth less than its face value.