Stocks show ownership in a company and with it, you share in the profits, or losses. Bonds, on the other hand are a loan and you act like the bank when you buy a bond for a company. The same is true of savings bonds, only you’re the lending agency for the federal government. Bonds have always been a way to finance wars and huge government building projects as far back as the days of King Arthur. Lotteries, that started as far back as 187 B.C. in the Han Dynasty in China and taxes seem to begin as soon as man had the concept of money, are the only two forms that are older than the use of bonds. In fact, the Chinese even issued bonds as a ticket to enter their lottery.
In our country, savings bonds were a method of raising funds and quite patriotic at that. During World War II in particular, war bonds were on the lips of every patriotic movie star, advertised as part of shows like “George Burns and Gracie Allen” and even offered an opportunity for children to help the war effort by offering savings stamps that the child converted to a bond when he saved a sheet of them. Today, while the patriotism isn’t associated with the purchase of the bonds, they are a way to invest safely and with no fluctuation in principal.
Unlike regular corporate or government bonds, you purchase paper savings bonds from financial institutions at a discount and simply allow the years of interest to increase their value to face amount. While Corporate and treasury bonds sell for face amount, discounted price or a premium rate on the open market, there is no trading market for savings bonds. They function much like a long-term CD but the purchase price is half that of the face value.
Today, the government now sells savings bonds directly to the public online at Treasury Direct. The government sells the online bonds at full face value, unlike their paper counterparts. If you already own bonds, you can convert them to their online value and eliminate the need for retaining your paper bonds in a lockbox or safe place. All the records are online and available to you at any time. If you want to keep the bonds but like the idea of knowing their value at any time, you simply input your bond information at the site and it tracks their value.
There are two popular series of bonds today, EE and I bonds. As noted previously, when you purchase them online, you purchase the bonds for full face value. A $50 bond costs $50. The paper bonds sold at financial institutions sell the way bonds originally sold, unlike their electronic counterparts. When you purchase a $50 bond in person, you only pay $25. Regardless of the way you buy bonds, you can only invest a maximum of $5,000 per year per social security number in any one calendar year, per bond series. You cannot redeem bonds for a year. In addition, if you redeem EE/E bonds in the first five years, you’ll forfeit the last three months of interest. After five years, you lose nothing but future interest. EE/E bonds have varying rates of return. Bonds issued after May 2005 earn a fixed rate noted on the bond. Those issued between 1997 and April of 2005 varies according to the 5-year yield of Treasury securities. Their return is 90 percent of the 6-month average. Their interest compounds semi-annually. After 30 years, the bonds no longer earn interest. Besides being exempt from local and state tax, you can exclude interest on bonds used for education at a vocational school or college.
I bonds have the same benefits and increments as the EE bonds but you calculate the interest differently. They use a base fixed rate and add a variable semiannual inflation rate, which the treasury bases on the consumer price index for March and September.
While you’ll never make bundles of money from buying bonds, you are financing the government, receiving a low risk income and receiving some tax breaks along the way. This type of investment isn’t the place for all your money but a portion of funds, particularly those for college, is perfect for this type of low risk investment. Savings bonds aren’t right for those who want current income but they’re wonderful gifts for children and a patriotic method of saving.