Every year, the government issues savings bonds to the public – also known as treasury bonds. These represent a form of government debt and are one of the ways that government pays for things. Individuals and institutional investors buy this debt in the hopes of making a return on their investment. But how exactly do treasury bonds work?
You can find treasury bonds for sale at most major investment companies, like Vanguard or Fidelity. Alternately, you can do directly to the US Treasury website and take a look at the various types of treasury bonds which are available. Bonds are available starting at $25 each. Interest rates vary depending on a multitude of factors.
Anyone who is interested can buy these bonds. You don’t need to have a lot of money to get started buying government treasury bonds. You can buy them with as little as $25, or if you have more money, individual bonds can be purchased up to $10,000 in face value denominations.
For many bonds available from the US Treasury, it takes up to a year for the bonds to mature and provide you with your earnings. Oftentimes if you choose to cash out the bond early, you will be forced to pay a rather substantial penalty.
Many people get government savings bonds as an investment from a relative. Grandparents can be notorious for giving savings bonds to grandkids as Christmas and birthday presents. These grandparents see these bonds as low-risk investments – and they are. Government backed bonds are one of the safest forms of investment around. They are backed by the US Goverment. As long as the US Government exists, the bonds should be worth something. And if the government fails, you are likely to have more things to worry about than your bonds.
In addition to security, there are other advantages to investing in treasury bonds. Many treasury bonds are tax exempt. Some bonds are exempt from state and local taxes. Anything you earn on the bond is not subject to being taxed. This can be particularly important if you are in the upper tax brackets. Before you buy a specific bond, it is important to learn what the tax status of that bond is. Not all are exempt from taxes, and you should know what you are buying before you invest.
If you utilize the earnings from a treasury bond for educational purposes you can often take a tax exemption on the interest you earned. This is a good option for many students.
Treasury bonds generally have low interest rates. For example a fixed rate EE bond earns about 3.6%. A variable rate “I” bond is going for about 4.2%. These rates are often less than most of high-yield money market accounts. However, many people prefer them due to their security and tax advantages.
Treasury bonds are not for everyone. They are safe investments in government debt. You won’t make a lot of money with them, but you likely won’t loose a lot either. In today’s economy, this can be a good thing.