Savings bonds are Treasury securities that are
payable only to the person to whom they are registered. In other words,
you can't resell them although you can cash them in. Savings bonds
can earn interest for up to 30 years, but you can cash them in after
one year, the minimum holding period. If you redeem a bond before
five years, there's a three-month interest penalty.
The government issues two savings bonds -- the I bond
and the Series EE Patriot bond, which will be discussed in the next
The I bond is an inflation-indexed savings bond.
It has a fixed rate of return plus an inflation premium. The fixed
rate and the inflation premium are adjusted every May and November
by the Treasury Department. But the fixed rate assigned when you
buy the bond is good for as long as you hold the bond. The inflation
premium ensures that you do not lose the purchasing power of your
investment over time.
At a glance
Here's how it works. Suppose you buy an I bond in December. The
fixed rate that was set in November will be your permanent fixed
rate. You'll also get, for six months, whatever inflation premium
was set in November. When June rolls around your inflation premium
will be changed to whatever rate was established in May, but your
fixed rate will remain fixed.
I bonds increase in value monthly, and interest is
compounded semiannually. The interest accrues and is paid at maturity.
You may choose to report interest each year as it
accrues or you may defer payment of the federal tax on the interest
until the bond is cashed, which gives you, the investor, control
over when to pay the tax.
I bonds can be used to pay for college tuition and
fees. Up to 100 percent of the interest in I bonds may be exempt
from federal taxes if the bond owner pays qualified higher education
expenses at an eligible institution in the same calendar year the
bonds are redeemed.
I bonds can be bought and redeemed at many financial
institutions. They may also be available through your employer's
payroll savings plan, or you can order them online.
When purchased through financial institutions or payroll
savings, the bonds can be bought in eight denominations: $50; $75;
$100; $200; $500; $1,000; and $5,000. When you buy them
online through TreasuryDirect, a $25 denomination also is available.
Investors may purchase up to $5,000 worth of paper I bonds per
year per Social Security number. You may also purchase an additional
$5,000 in electronic I bonds through TreasuryDirect.
For the latest I bond rate, see the related story, "I bond's new rate."