US Savings Bonds

These bonds are available in Series EE and Series I. Electronic series EE bonds are purchased via a Treasury Direct account for face value and paper series EE bonds are purchased at their face value. One earns a fixed rate of interest for the thirty year term of the bond. The treasury guarantees that the bonds will double in face value in twenty years.

• Series I bonds sell at face value at interest rates guaranteed to exceed that of inflation.
• These bonds are not tradable.
• The maturity periods can vary. For example, if you buy a bond with a value of $50 for $25, you’ll have to wait at least 17 years to get back your investment from the government.
• US savings bonds are exempt from state and local taxes.
• Federal tax is deferred until the bond is cashed in.
• Interest may be tax exempt if you can document that interest was used to pay qualified higher education expenses and provided that your income falls within federal guidelines for this benefit.
• As with many long term investments you will commonly cash in US savings bonds when you are retired and when your tax rate is low.
• US savings bonds pay interest twice a year and are redeemed at par value at maturity.
• Savings Bonds come in eight values: $50, $75, $100, $200, $500, $1,000, $5,000 and $10,000.

Why Purchase US Savings Bonds?

There are certainly lots of investments that can make a lot more money over the years than US savings bonds. And there are lots of investments that can disappear in a puff of smoke during an economic downturn. US savings bonds are like money in the bank. A good rule of thumb for investing is to first pay off credit card debt, invest in your home, and put six months of savings away for emergencies. Think of US savings bonds in this context.

US Savings Bonds versus Municipal Bonds

Like municipal bonds, US savings bonds are free of state and local taxes. Unlike municipal bonds US savings bonds are less likely to default than when cities like Detroit declare bankruptcy.

US Savings Bonds versus Dividend Stocks

Dividend stocks are a common way to balance the risk in an aggressive stock portfolio. However, even large cap stocks call fall in price or fall out of favor. When markets are falling US savings bonds still maintain their value and pay interest.

Buying US Savings Bonds

Bonds are purchased with a Treasury Direct account. For such an account you need a social security number, a driver’s license, a checking or savings account, and an email address. According to the US Treasury site:

• Minimum Purchase: $25
• Maximum Purchase: $30,000 per person per year
• Interest: 90% of 6-month average of 5-year Treasury security yields, added monthly and paid when the bond is cashed
• Minimum Term Of Ownership: 12 months
• Early Redemption Penalty: Forfeit three most recent months’ interest if cashed before 5 years

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European Investments

Using the popular “Blood in the Streets” analogy, is it time to invest in Europe? How about taking advantage of high European bond rates? It comes down to the degree to which the main players in the Euro Zone, Germany and France, will be willing to share the risk. Currently these nations are putting money into a pool to help bail out their less solvent partners in the EU. However, there is talk of Euro bonds instead of bonds from individual European nations. High European bond rates would certainly fall if German credit were mixed with that of less prosperous nations. If that were the case those who currently invested today and took advantage of high European bond rates would reap a windfall. On the other hand, if the relief funds dry up those holding Italian, Spanish, and Greek bonds could well see their capital disappear. A huge part of the fundamental analysis necessary to get into such investments has to do with the uncertainty of the ongoing debt dilemma.

European Growth or Decline

It has become clear to many that strict fiscal austerity alone is not going to get the Euro Zone out of its debt dilemma. People need to work to eat and work to pay taxes. The high unemployment and general uncertainty in Europe has caused changes of government in France and a runoff election in Greece bringing about the possibility again of a Greek financial collapse . The strict fiscal requirements that have come with multiple bailouts are driving the Euro Zone economy into recession this year. Actually, nations like Greece have never come out of the recession that started in 2008. Add high European bond rates required by uncertain equity markets and you have a recipe for slow or non-existent economic growth, more difficulty paying debts, continual bailouts financed by printed money, and a steadily devalued Euro. The survival of the Euro Zone in all of its current parts may well be possible at the cost of greatly devalued Euro. Then anyone who wishes to invest in high European bond rates will need to take the falling Euro into their long term calculations.

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While making the decision as to which bonds one should invest, in a very important factor should be the interest rates of the bonds. Bonds are available with interest rates that are fixed, adjustable, or payable when they mature. A bond that is fixed means that the interest rate is the same until maturity and the interest rate that is paid is a percentage of the principal amount. Floating or adjustable bonds are comprised of an interest rate that tracks closely with current market rates. The interest rates change sporadically with the rate index for this type of bond. The final type of bond is one that pays out the interest earned plus the principal amount in a single payment at when the bond matures. Part of the decision-making process when bond investing is to choose whether to invest in short-term bonds, intermediate or long-term ones. It usually takes short-term bonds five years to mature; intermediate bonds take five to twelve years, and long-term bonds take more than twelve years to reach maturity. The term maturity indicates the date when the principal amount invested by the investor is repaid. This time period can be of varied lengths and can be as long as thirty years.

Each investor should understand the facts when investing in bonds. The beginners in the field should be aware of the fact that there is a possibility of losing money while investing money in bonds and that their price moves in the direction opposite of interest rates. If you hold onto the bond until maturity, then it doesn’t matter when interest rates fall, bond prices rise. At maturity you’ll receive the amount written on the face of the bond as well as any interest that has accrued. Be aware that stocks do not always outperform bonds, so you should research bond investments and investing in stocks so that your portfolio is diversified.

It’s mandatory to gain an understanding on how an investor proceededs to invest in various bonds. They have the option of buying through a broker, a mutual fund, or straight from the government. If you are planning to buy through a broker it would be prudent to purchase fresh issues at wholesale as far as possible. The broker can also help you in investing in bonds that are older and are traded in the ‘secondary market.’ This is normally done over-the-counter and not on a stock exchange such as the New York Stock Exchange, however the costs for transactions are much higher here. The investors who would like to invest in dozens of bonds with the benefit of a fund manager who makes the decisions for the bonds purchase through mutual funds. These kinds of bond funds have more liquidity compared to individual bond issues. One final way you can buy bonds is to purchase them at the auctions held by the U.S. government. The most inexpensive method to accomplish this is to purchase them directly from the U.S. Treasury to prevent having to pay bank or broker fees.

Now that you have been briefed with an overview about bond investments, you should do your own research so that you will be well educated when it comes to making wise investments.