People invest in bonds for their own personal reasons. Some of the obvious reasons would be the fact that they are considered long-term investments, they can be a steady source of income from interest payments, they can combine well with stock investments, they have education and retirement benefits, they offer great tax advantages, they are easy to buy, and they are primarily safe and secure. Some people buy savings bonds as gifts for loved ones or simply as collector’s items. There is very little risk in buying savings bonds because you are practically certain that the U.S. government is not going to go out of business any time soon. With the several types of bonds available, choosing one depends on your needs and investment goals.
Some bonds, like Treasury or “T-bonds” are marketable securities issued either by the government or a corporation. They are considered to be marketable because they can be sold immediately after purchase. Savings bonds, as opposed to T-bonds, cannot be traded or sold. They are registered securities because they are owned by the person[s] whose name appears on them. Both categories are specifically issued by The United States Treasury Department. Purchasing bonds essentially allows you to loan the issuer money. As an owner, you will receive semi-annual interest payments for 30 years. All of the information pertaining to the amount of the loan, interest payments, interest rates, and the maturity date (the date by which the principal of the loan must be repaid) will be issued when you purchase the bond. Savings bonds cannot be used as collateral for any type of loan.
There are several types of savings bonds, such as U.S. Treasury, U.S. Agency, corporate, municipal and zero-coupon (those that do not accrue interest). There are several types of series of savings bonds, as well, such as: EE, I, or HH. Each of these represents a different function. Both EE and I series are accrual-type securities. The EE series is offered at a percentage of the face value. The I series is offered at the face value. They both have accumulating interest that is disbursed as part of the redemption value once you cash the bond. Series HH is different. They are current-income bonds that are purchased at face value. The interest is paid semi-annually by directly depositing funds into the bond owner’s checking or savings account, according to Bureau of the Public Debt and Treasury Direct Web site.
You can purchase any one of these bonds by going into your local bank, using a payroll savings plan or purchasing through the Internet. The HH series is bought by exchanging series EE bonds and Savings Notes that reach a total of at least $500. Some are sold at auctions, but cannot be cashed in. They are just used as collector’s items. There are a variety of designs to choose from and you can purchase them at face values ranging from $50 to $10,000. Series HH are only available in the denominations of $500 to $10,000. The other two series are available in all of the above mentioned denominations. Depending upon the interest rates of some bonds, the value of your bond may fluctuate. The higher the interest rate, the higher the bond is sold on the market and vice versa.
There are other differences with the EE series as well. The EE series replaced the popular E bonds, or “war bonds,” as they were called in 1980. The EE series also introduced Patriot Bonds (issued to show support for the anti-terrorism efforts) in December of 2001. These can be purchased as gifts, but cannot be purchased through your payroll savings plan because Patriot Bonds are specially inscribed and can only be done so through a bank or similar financial institution.
By Jaime Cannon