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 was a nice gift for babies because by the time they graduated high school the bond would have matured and the young adult could cash it in for face value. Bonds as gifts show a very nice sentiment and are kind of a nifty gift onto which kids could hold. In fact, bonds are one of the only securities which can be held in a minor’s name.
How savings bonds gain value
The way in which and the rate at which bonds gain value has changed in recent years. Generally, the most common type of bond is the Series EE Bond, also known as the Patriot Bond after 2001. There was no real change to the bond’s value only a name change printed on the front denoting a more patriotic meaning. Prior to May of 2005, bonds accumulated interest at a variable rate based on the treasury yields over a 5 year period. Bonds can accumulate value faster or slower, depending on the date of purchase and what course the economy takes 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. Make sure you have proper ID and you simply sign it, and get the cash. That all said, there are tax issues to contemplate. Interest earned on the bond is taxable in the year it’s redeemed. Parents can cash in bonds for their children with a little more paperwork, as they do have to verify they are the parents and have legal custody. It’s beyond easy.
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. That said, if you look at the interest bonds are earning, there could be better things to do with your investment in your 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 were to take that original $ 50 – $ 100 and place it in a mutual fund the return on investment could triple in the short run and well out perform the bonds over the child’ s entire childhood. Granted, the mutual fund would be in an adult’s name, lose the patriotic feel, and does have risk involved. You may have to ask what’s best for the child – a cool piece of paper, or money for college?