Bonds resemble loans. They are debt securities and formal contracts to pay off the borrowed amount of money with interest during the term of the bond. Most bonds are purchased from financial institutions and interest is accumulated for the life of the bond. Prior to maturity or the end of the term, bonds are commonly resold.
Whether you are preparing for your child's college education or saving for retirement, it is certainly beneficial to understand the types of bonds, particularly Savings Bonds, which are considered to be the safest form of investment.
Savings bonds are debt securities issued by the United States Treasury. The federal government employs the bonds as means to borrow money from the investor. Since bonds are financial obligations of the government, they are considered the most secure form of investment and work to your advantage because they are tax-exempt. Hence there is no need to pay local or state taxes, and you earn interest minus risks to your investment. Savings bonds are non-negotiable and generally non transferable. Under limited circumstance, they can be transferred with minimal tax penalty. In cases where your savings bonds are stolen, lost or destroyed, they can be replaced, as your savings bonds are registered with the US Treasury.
You can purchase savings bonds from commercial banks. There you will fill out purchase documents that will be forwarded to the US Treasury. You can also procure savings bonds from your employer or through the Internet. The popular types of savings bonds are:
- Series EE Bonds. These are sold in denominations of $50, $75, $100, $200, $500, $1,000, $5,000 and $10,000. These bonds cost 50% less than their face value for a term of 30 years. For instance if you purchase a denomination of $200 you only pay $100. At the end of the term, the worth returns to its original face value. Series EE bonds interest rates are calculated every month, but until the bonds are redeemed, they are not paid.
- Series I Bonds. Offer the same denominations as Series EE Savings Bonds, but you will purchase them at face value in increments of $25.00. These are bonds with fixed rates and an inflation premium. Every month they increase in value, while interest is computed twice a year depending on economic indicators.
Other types of bonds are government bonds, municipal bonds, treasury bonds, premium bonds, bail bonds, etc. Government bonds, Municipal bonds and Treasury bonds are similar to savings bonds in terms of low interest rates. Bail bonds are issued by insurance companies to allow accused defendants to be taken out of prison before trial proceedings. They are designed to guarantee the defendants' appearance in court when trial proceedings begin. Bail bonds typically require collateral like a mortgage or deed of trust. In cases where a defendant skips bail, upon failing to comply with the terms and conditions of the bond or by order of the court, the bond will be forfeited.
To find out what your savings bonds and other bonds are worth, build an inventory of bonds and help you manage your bonds, online bond calculators and bond wizards are available on the net for your assistance. The calculator can readily be accessed for free, while you may need to buy or download the wizard software.