savings bond

A nontransferable registered bond issued by the U.S. government in denominations of $50 to $10,000.

A U.S. government savings bond that offers a fixed rate of interest over a fixed period of time. Many people find these bonds attractive because they are not subject to state or local income taxes. These bonds cannot be easily transferred and are non-negotiable.

Investopedia Says:
U.S. savings bonds are one of the safest types of investments because they are endorsed by the federal government and, therefore, are virtually risk free. Although these bonds do not earn much interest compared to the stock market, they do offer a less volatile source of income.

Related Links:
They may not be sexy, but bonds offer undeniable benefits to investors. The Lowdown On Savings Bonds
Understanding how this measure works in the market can help keep your finances afloat. Diving In To Financial Liquidity
Find out how fixed-income investments evolved in the past century and what it means today. The Bond Market: A Look Back
They may not be sexy, but bonds do have a place in every balanced portfolio. Find out why. Advantages Of Bonds

U.S. Government bond issued in Face Value denominations ranging from $50 to $10,000. From 1941 to 1979, the government issued Series E Bonds. Starting in 1980, Series EE and HH bonds were issued. Series EE bonds, issued at a discount of half their face value, range from $50 to $10,000; interest bearing Series HH bonds range from $500 to $10,000. Series EE bonds earn interest for 30 years; Series HH bonds earn interest for 20 years. Series EE bonds, if held for five years, pay 90% of the average yield on 5-year Treasury securities based on the previous six months. Series HH bonds are no longer issued. For many years, the government guaranteed a minimum yield on savings bonds. This yield decreased from 7.5% to 6% and then to 4%. The guaranteed minimum feature was dropped in May 1995, and bonds issued on May 1, 1997 or later and held for less than five years are now subject to a 3-month interest penalty. For example, a bond cashed in after 18 months would receive 15 months' worth of interest. Savings bond yields are readjusted every six months, on May 1 and November 1.

Series I bonds provide a return that rises and falls with inflation. I bonds are issued in face amounts from $50 to $10,000. The interest on an I bond is determined by two rates. One, set by the Treasury Department, remains constant for the life of the bond. The second is a variable inflation rate announced each May and November by the Treasury Department to reflect changes in the Consumer Price Index reported by the Department of Labor. I bonds earn interest for 30 years and interest is added monthly and paid when the bond is redeemed.

The interest from savings bonds is exempt from state and local taxes, and no federal tax on EE bonds is due until redemption. Taxpayers meeting income qualifications can buy EE bonds to save for higher education expenses and enjoy total or partial federal tax exemption. This applies to individuals with modified Adjusted Gross Incomes between $61,200 and $76,200 and married couples filing jointly with incomes between $91,850 and $121,850. Income levels are adjusted for inflation annually. See also I-Bonds.

During World War I the United States lent money to its allies in Europe to allow them to continue fighting. In order to raise the funds for these loans, the Federal Government in turn borrowed money from its citizens by issuing U.S. Treasury bonds, also called Liberty Bonds or Liberty Loans. In the end the United States government lost money on Liberty Bonds because, although it paid back citizens at the promised rate of interest, its allies in the war either could not make payments, as was the case with tsarist Russia, or made them at a much lower rate interest than originally promised, as did the United Kingdom, France, Italy, and Belgium. Nevertheless, the Allies could not have won the war without American money. Indeed, financial support from the United States most likely contributed more to the war effort than did American military victories.

After the discontinuation of liberty loans, the federal government made no similar offering until 1935. Between March 1935 and April 1941, it issued $3.95 billion worth of "baby bonds," as they were called, in denominations ranging from twenty-five dollars to a thousand dollars. On 30 April 1941 the federal government took the baby bonds off the market and the following day issued the first of the defense savings bonds, in the same denominations and bearing the same 2.9 percent interest. Secretary of the Treasury Henry Morgenthau, Jr., sold the first bond to President Franklin D. Roosevelt. In December, when the United States entered World War II, defense savings bonds took on a new name: war savings bonds. After the war they were once again known as defense bonds. After the Korean War the federal government simply termed them savings bonds.

Interest rates on savings bonds rose periodically to reflect rising rates in the general market, but they were always lower than prevailing interest rates. Thus, savings bonds have tended to appeal to cautious investors who value security over high return rates. Between 1952 and 1956 the general public could also buy bonds in denominations as high as ten thousand dollars. Beginning in 1954, trustees of employee savings plans were able to buy hundred-thousand-dollar bonds.

In April 1941 savings stamps, introduced during World War I, reemerged in a different form. They were available in denominations ranging from 10 cents to five dollars. They bore no interest, but purchasers could exchange them for bonds in units of $18.75, the price of a bond redeemable at maturity for $25. The purpose of the stamp program, which ended on 30 June 1970, was to foster patriotism and thrift in schoolchildren.

In December 1941 the federal government established the payroll savings plan, whereby employees voluntarily arrange for regular deductions from their salaries for the purchase of savings bonds. The plan became the major source for sales of bonds in denominations ranging from twenty-five dollars to one thousand dollars both during and after World War II. By the end of 1975, Americans had bought almost $68 billion worth of bonds. Savings bonds lost popularity during the 1990s, when a strong stock market appeared to offer a better return on investors' money, but they began to regain some of their allure in the early twenty-first century once the stock market slowed and the United States entered a military conflict with Afghanistan.

Bibliography

Eichengreen, Barry and Peter H. Lindert, eds. The International Debt Crisis in Historical Perspective. Cambridge, MA: MIT Press, 1989.

Papayoanou, Paul A. Power Ties: Economic Interdependence, Balancing, and War. Ann Arbor: University of Michigan Press, 1999.

Rundell, Walter, Jr. Military Money: A Fiscal History of the U.S. Army Overseas in World War II. College Station: Texas A&M University Press, 1980.

Samuel, Lawrence R. Pledging Allegiance: American Identity and the Bond Drive of World War II. Washington, D.C.: Smithsonian Institution Press, 1997.

Sessions, Gene A. Prophesying upon the Bones: J. Reuben Clark and the Foreign Debt Crisis, 1933–39. Urbana: University of Illinois Press, 1992.

A bond issued by the United States government and sold in relatively small denominations, mainly to individuals.