A savings bond is a relatively safe investment that helps you accrue extra money for the future, especially if you can wait 20 years.
Savings bonds are guaranteed by the federal government and generate steady returns by earning interest monthly. One drawback is that their interest rates can be lower than some high-yield savings accounts or certificates of deposit (CDs).
“Safety is the primary benefit of buying either an I or EE savings bond,” said Anthony Chan, former chief economist at JPMorgan Chase. “These assets represent the safest securities that any investor can buy and are backed by the full faith and credit of the U.S. government.”
What is a savings bond?
A US savings bond is a bond available for purchase to help fund federal spending. By buying a bond, you’re lending money to the government. Then when you cash the bond, you get what you paid plus interest.
The federal government issues two types of savings bonds that provide a steady income to investors.
- Series EE US Savings Bonds: These bonds have a set interest rate for the first 20 years and are guaranteed to double in value.
- Series I US Savings Bonds: Series I bonds have interest rates that may change every six months, based on inflation. This protects investors during periods of higher inflation rates.
How to check the value of your savings bond
The value of your savings bond can be easily accessed by logging into your TreasuryDirect account where you purchased it. Since the majority of savings bonds are sold online only now, you can see their current value when you go to your account and look under the tab that says current holdings.
Investors who still have paper savings bonds can go to the TreasuryDirect website and use the calculator for savings bonds. The website will ask for the issue date, bond series and denomination of the bonds.
The only way to buy a Series I paper bond now is to use your tax refund as payment. They are available in $50 increments up to $5,000.
The calculator will give you a value for what the paper bonds are worth today. If your bonds have not matured yet, the calculator can also estimate the value of what they will be in the future.
You can redeem savings bonds at any time after one year, but you stop earning interest on them when they reach maturity.
The website gives you the option to type in information for all your bonds and figure out the total value.
Different types of savings bonds
The U.S. government issues two types of savings bonds that are known as an I bond or an EE bond.
The advantage of the I bond is that it offers protection from high inflation rates because you receive a fixed rate of interest, plus another interest rate that moves with inflation.
The inflation rate is set two times a year for the following six months.
“An individual can buy either an I or EE bond, but the I bond is a no-brainer because it pays a higher rate in a world where the inflation rate is growing above its trend,” said Chan. “The I bond is currently offering a rate of 5.27% (which includes a fixed rate of 1.3%, plus a varying adjustment for inflation) versus a fixed rate of 2.7% for an EE bond.”
During periods of low inflation, the EE bond is “the way to go, while during periods of high inflation, the I bond is the way to go,” he said.
Both the I bond and EE bond mature in 30 years, but either bond can be redeemed after holding them for 12 months. The catch is that if they are held for less than five years, you will forfeit the last three months of interest, Chan said.
The EE bond provides lower risk because it earns interest regularly for the next 30 years. The federal government guarantees that the value of the bonds will double in value in 20 years.
The federal government allows you to buy $10,000 in electronic EE bonds, $10,000 in electronic I bonds and $5,000 in paper I bonds that you can purchase using your tax refund from the IRS when you file federal tax returns each calendar year. You can cash in I bonds after one year, but if you don’t wait for a minimum of five years, the penalty is losing three months of interest that was earned.
“Savings bonds have relatively low annual purchase limits and restrictive withdrawal penalties, so investors need to carefully consider these factors before allocating capital to them,” said Henry Yoshida, founder and CEO of Rocket Dollar, an Austin, Texas-based self-directed individual retirement account and Solo 401(k) provider.
Factors that influence the value of a savings bond
The value of a bond is determined by fluctuations in the interest rate that correspond to the maturity of the bond.
“The good news is that your savings bond face value does change as interest rates fluctuate,” Chan said. “I-bonds will upwardly adjust their interest rate payouts as inflation rates rise while keeping the bond’s face value unchanged. If you think you can do better, you can always redeem your bonds after holding them for 12 months, subject to the forfeiting of three months of interest if they are held for less than five years.”
The interest rates for savings bonds are set on May 1 and November 1 and are based on the rate of inflation in the economy, Yoshida said.
“If inflation rises, then the rate paid on the bonds increases and as inflation goes down, the set bi-annual interest rate will adjust downwards,” he said.
Calculating the interest of your savings bond
The interest rate on EE bonds is simply a fixed rate of interest determined by the government. The I-bond pays a lower fixed interest rate, but the interest rate is adjusted every six months for inflation.
The interest for both I and EE bonds is earned monthly. The interest for them is compounded every six months and is added to the principal value or the amount that you purchased the bonds twice a year. The principal amount grows steadily since the interest is added to it.
When is the best time to cash in savings bonds
The best time to cash in a savings bond is after it reaches the five-year holding period to avoid forfeiting the last three months of interest.
“That is not a significant penalty, but since preventing losses is always best, one should generally buy these bonds if one intends to hold them for a minimum of five or 30 years,” Chan said.
Frequently asked questions (FAQs)
The value of an EE bond does not change often since you receive a fixed rate when you purchase it. For the first 20 years, the interest rate remains the same, but it could change in the last 10 years of the 30-year period. The value of EE bonds will be doubled at 20 years compared to the rate you purchased it and is guaranteed by the U.S. government.
The value of I bonds changes every six months because that is when the government calculates an inflation rate every May and November. I bond rates are guaranteed to never fall below zero.
The value of a savings bond can decrease. The market value of holding an EE bond should theoretically fall as interest rates rise because receiving a fixed interest rate during the bond’s life diminishes if interest rates rise, Chan said.
“The good news is that the government is always there to redeem them at their original face value after an investor holds them for a minimum of 12 months,” he said.
Investors who can’t wait at least five years before cashing a savings bond will lose a small amount of money, which is the last three months of interest.
The I bonds earn both a fixed rate and the rate of inflation that is determined twice a year, while the E bonds receive a set fixed rate when they are purchased.
