Savings Bonds

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Savings bonds are a long-standing method of both saving and investing. They are issued by the federal government, which means they are as safe an investment as you can make. They are often bought by individuals and can be bought for as little as $25; in certain situations they can be bought for even less. Savings bonds are a form of government security, and just like other government securities they pay interest. However, savings bonds may not be resold by the person who owns them; they can usually only be redeemed - in other words, cashed in - by the holder whose name appears on the bond. This means they cannot be traded in the same way as some other government securities. Savings bonds are often given as gifts. They can be bought and redeemed at over 40,000 financial institutions across America. There are several main types of savings bonds: 1. Series EE are "accrual" securities, which means that the interest earned on the bond is added back to the original value, and so increases by compounding (see Compound Interest). With these bonds, the total earnings are received only when the bond is redeemed. For example, a $50 bond that is redeemed after a period of five years may have increased in value to $75. 2. Series HH savings bonds are "current income" securities. These bonds pay interest semiannually until they are redeemed, at which time the face value of the bond is received back. (The U.S. Treasury ceased issuing new HH bonds in September 2004.) 3. I Bonds, which like Series EE bonds are accrual securities, offer some protection against inflation. This is because the bond has a twopart interest rate: a fixed rate that lasts for the life of the bond, and an inflation adjustment that is made twice a year. This adjustment is linked to the consumer price index. Interest payments on savings bonds are typically exempt from state income tax and local taxes, and any federal income tax on earnings may be deferred until the bond is redeemed or it matures (see Maturity Date [Bonds]). There are limits on how many savings bonds you can buy in any one year, and there are usually restrictions on when you can redeem savings bonds, typically not until at least twelve months after the bonds have been issued. Also, redeeming Series EE bonds and I Bonds before five years has passed may result in a penalty. Some savings bonds that were issued a long time ago - typically over twenty years - may have stopped earning interest and should be redeemed. It is estimated that unredeemed savings bonds worth around $13 billion fall into this category.