How savings bonds work

U.S. Savings Bonds come in a number of types and denominations from $ 25 to $ 10,000. Bonds heretofore were bought at half the face value, and accrued interest until a maturity date, when they’d be worth face value or better. For example, a $ 50 bond could be purchased for $ 25 and would attain a redeemable value of $ 50 somewhere in the future. 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 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. 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. Before May 2005, bonds accrued interest at variable rates based on treasury yields over a 5 year time span. 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 own bonds and want to know their value you can check on the TreasuryDirect.gov website, which has a calculator program. All you do is look up the type of bond, the face value, and the month and year of purchase, and the calculator will show you the current value.

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. Any interest earned on the bond is taxable in the year that it is 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 the children?

It is true that bonds can be issued in the child’s name, have a very patriotic sheen, and are a very safe investment. 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. Bonds purchased since 2001 with variable interest rates, typically earn a yield annually 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, a mutual fund has to be in an adult’s name, isn’t as patriotic, and carries risks. However, you have to ask what is best for the child: a nifty piece of paper or more money for college?