How Do Savings Bonds Work?

Looking for a nearly risk-free way to save for the future? A savings bond might be right for you.

With amounts ranging from $25 to $10,000, US savings bonds fit almost any budget. Most importantly: You’ll never lose value on your initial investment.

Plus these bonds are backed by the full faith and credit of the US government — which has never defaulted on bonds.

The catch? Savings bonds typically don’t earn much interest. However, that’s not always the case, especially during times of high inflation.

Curious to learn how savings bonds work?

Read on.

What Is a Savings Bond?

A savings bond is essentially a loan to the federal government issued by the US Treasury.

Think of it as an IOU from Uncle Sam. You give the government your money, and in exchange, the US government pays you back — with interest — at a later date.

There are two types of savings bonds:

1. Series I Bonds
2. Series EE Bonds

Savings bonds are sold at face value. If you want to invest $100, for example, you buy a $100 bond. There are no fees or hidden expenses.

After you purchase a bond, you start earning interest on your principal. Interest can accumulate for as long as 30 years.

Savings bonds are considered one of the safest investments out there. The interest rate can’t go below zero and the bond value can’t decline.

How Do Savings Bonds Work?

Savings bonds work by paying you compound interest on your deposit.

A bond savings accrues interest over time, though interest doesn’t pay out until you redeem the bond.

Interest on savings bonds is compounded semiannually, or twice a year.

This means that every six months after the bond’s issue date, interest the bond earned in the six previous months is added to the bond’s principal value. Interest is then earned on this new, higher principal value.

Here are some other characteristics of savings bonds:

• Your bond can accrue interest for up to 30 years after purchase.
• You must wait at least one year before you…