What About Savings Bonds?

Last week, we looked at the ins and outs of investing in a few specific types of long term government securities. We covered Treasury bonds, Treasury bills, and Treasury notes. All of these securities could be bought with $100 and had terms that ran from a few days until a few years. Today, we want to take a look at a more familiar type of government securities known as savings bonds. These investments are perfect for everyone from infants to the elderly. Savings bonds have been around forever and are still as popular as ever.

Let’s take a look at the two main types of savings bonds.

I Bonds

I bonds are inflation indexed bonds that are issued at the face value of the bonds. A $50 dollar I bond will cost you $50 dollars. I bonds compound interest every 6 months and the bonds continually earn interest until maturity. These bonds can earn interest for as long as 30 years. The interest rate on I bonds is based on the rate of an inflation plus a fixed rate. As the name suggests, the fixed rate stays the same for the life of the bonds. The inflation rate is adjustable and changes on May 1st and November 1st of each year. I bonds are attractive investments during periods of high inflation. I bonds can be cashed in anytime after the 1st year. Cashing them in early does mean that you will lose 3 months of interest however.

EE Bonds

EE bonds are interest bearing bonds that pay a fixed rate of interest for the life of the bonds. EE bonds are a favorite of fixed income investors because of the long term security of a guaranteed interest rate. One big advantage of EE bonds is that they double in value after 30 years. For example, a $50 dollar EE bond with a 30 year maturity date would only cost you $25 dollars today. You could redeem the bond for double the amount that you paid if you hold it until maturity. EE bonds are most attractive to investors when interest rates are high. You can lock in a high interest rate for 30 years and reap the reward of a great yield.

The Advantage of Government Bonds

Both EE and I bonds can be bought from banks or online through the Treasury Direct website. They are typically purchased in electronic form since the government is phasing out the paper bonds. There are a favorite of small investors because they can be purchased with as little as $25. Small incremental purchases are a great way to build up a bond portfolio. Investors also like these bonds because they are guaranteed by the government and offer fixed growth over the life of the bonds.