How savings bonds work
U.S. Savings Bonds have several types, and values of $ 25 up to $ 10,000. Traditionally, bonds were purchased at half their face value and accumulated interest until a maturity date that would make them worth their face value or more. For instance, a $ 50 bond can be purchased for $ 25 and attain a reasonable value of $ 50 somewhere down the line. It used to be a nice gift for infants, because the bond could be cashed for face value after the child had graduated high school, when the bond had matured. Bonds, given as gifts, are a nice sentiment an are nifty gifts kids can hold onto. In fact, bonds are one of the few securities that can be established in the name of a minor.
How savings bonds gain value
The way in which and the rate at which bonds gain value has changed in recent years. Typically, the most common bond series is the Series EE Bond, also called the Patriot Bond since 2001. There wasn’t any change in the bond’s value, just a more patriotic sounding name printed on the front. Before May 2005, bonds accrued interest at variable rates based on treasury yields over a 5 year time span. So, bonds could accumulate value faster or slower depending on when they were purchased and how the economy did over time. After May 1, 2005, bonds are assigned a fixed rate at the time of purchase. If you have bonds, and want to see what they’re worth, you can look them up at TreasuryDirect.gov website which has a calculator program. All you do is type in the type of bond, face value, and the month/year purchase date and the calculator will show you the current value of that bond.
How to redeem bonds
Bonds are easy to redeem at almost any financial institution. Just have proper ID and you simply sign them and cash them in. There are tax considerations, however. Interest earned on the bond is taxable in the year it’s redeemed. Parents can redeem bonds for their children with a bit more writing and signing to verify that they are the parent with legal custody. All in all, it is a very easy process.
Are bonds the best gift for children?
It’s true that bonds can be issued in a child’s name, they have a patriotic look, and are safe investments. However, if you look at the interest that bonds are earning there might be better things to do with your contribution to the child’s future. Typically, bonds purchased after 2001 with variable interest rates earn an average annual yield of between 1.6% and 2.5%. The fixed rate bonds purchased after May 2005 fare no better. If you took that $ 50 to $ 100 and put it in a mutual fund, the return could triple in the short run, and out perform the bond when the child is growing up. Granted, the mutual fund would be in an adult’s name, lose the patriotic feel, and does have risk involved. However, you have to ask what is best for the child: a nifty piece of paper or more money for college?
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