Important Facts About Saving Bonds
April 23, 2009 by How Savings Bonds Work
Filed under About Bonds
Unlike traditional bonds, saving bonds are not subject to the ups and downs of the stock market. Savings bonds are low risk, government-backed bonds with guaranteed rates of interest. There is a tax advantage to savings bonds because the owner may be able to partially or completely exclude their interest from Federal income tax.
There are three types of saving bonds: I, EE/E and HH/H. They are issued by the US Treasury Department. They can only be purchased in one of three ways: 1) through authorized financial agencies, such as a bank; 2) through payroll deductions; and 3) through an electronic service called TreasuryDirect. All saving bonds are registered and held in name of the person who owns them. Savings bonds are registered securities. They can be replaced if they are lost or destroyed.
Series I bonds are available at face value only. Series I bonds come in $50 to $10,000 denominations. No more than $30,000 (face value) of paper bonds and $30,000 of electronic bonds purchased each year. They must be held for a minimum of 1 year and they will accrue interest for 30 years. Interest on the Series I bonds is based on a fixed rate (announced by the Bureau of Public Debt in May of each year) and an annual inflation rate (announced in November of each year).
Interest is paid when the bond is redeemed. If this happens before the bond is five years old, there is an interest penalty equivalent to the three most recent month’s interest. Interest is not subject to State and local taxes. It is, however, subject to State and local estate, gift and other excise taxes. Interest on the bonds is also subject to Federal taxes. If the bonds are used to finance an education, all the interest or only part may be excluded from federal income taxes.
The series EE bonds replaced Series E. EE bonds are very affordable and can be purchased at one half of their face value. They come in denominations from $50 to $10,000. Individuals can buy no more than $30,000 (face value) worth of paper bonds and $30,000 of electronic bonds annually. EE bonds purchased between May 1997 and April 30, 2005 earn a variable market-based rate of return. Those issued May 2005 onwards earn a fixed rate of interest. They will generate interest for 30 years and the interest is compounded semi-annually. The Series EE bonds are similar to the Series I Bonds in regard to interest payment and time of redemption. The biggest difference between EE and I bonds is that interest rates are figured differently. EE Bonds receive 90% of 6-month averages of 5-year Treasury Securities market yields.
Prior to September 2004, Series HH savings bonds could be purchased only in exchange for Series EE/E bonds. After that date, they could be purchased without them. Series HH bonds are available in denominations ranging from $500 to $10,000. They are purchased at their face value. There is no limit on the amount that can be purchased.
The interest on Series HH bonds is fixed on the date of purchase and will continue to accrue for 20 years. The interest is deposited directly into the owner’s checking or savings account. Series HH Savings Bonds must be held for a minimum of six months. Like Series I and EE, the interest on Series HH bonds is not subject to State and local taxes. It is, however, subject and State and local inheritance, gift and other excise taxes.
Thanks to Joe Goertz for contributing this article to our Bonds blog:
There are three types of saving bonds: I, EE/E and HH/H. They are issued by the US Treasury Department. They can only be purchased in one of three ways: 1) through authorized financial agencies, such as a bank; 2) through payroll deductions; and 3) through an electronic service called TreasuryDirect. All saving bonds are registered and held in name of the person who owns them. Savings bonds are registered securities. They can be replaced if they are lost or destroyed.
Series I bonds are available at face value only. Series I bonds come in $50 to $10,000 denominations. No more than $30,000 (face value) of paper bonds and $30,000 of electronic bonds purchased each year. They must be held for a minimum of 1 year and they will accrue interest for 30 years. Interest on the Series I bonds is based on a fixed rate (announced by the Bureau of Public Debt in May of each year) and an annual inflation rate (announced in November of each year).
Interest is paid when the bond is redeemed. If this happens before the bond is five years old, there is an interest penalty equivalent to the three most recent month’s interest. Interest is not subject to State and local taxes. It is, however, subject to State and local estate, gift and other excise taxes. Interest on the bonds is also subject to Federal taxes. If the bonds are used to finance an education, all the interest or only part may be excluded from federal income taxes.
The series EE bonds replaced Series E. EE bonds are very affordable and can be purchased at one half of their face value. They come in denominations from $50 to $10,000. Individuals can buy no more than $30,000 (face value) worth of paper bonds and $30,000 of electronic bonds annually. EE bonds purchased between May 1997 and April 30, 2005 earn a variable market-based rate of return. Those issued May 2005 onwards earn a fixed rate of interest. They will generate interest for 30 years and the interest is compounded semi-annually. The Series EE bonds are similar to the Series I Bonds in regard to interest payment and time of redemption. The biggest difference between EE and I bonds is that interest rates are figured differently. EE Bonds receive 90% of 6-month averages of 5-year Treasury Securities market yields.
Prior to September 2004, Series HH savings bonds could be purchased only in exchange for Series EE/E bonds. After that date, they could be purchased without them. Series HH bonds are available in denominations ranging from $500 to $10,000. They are purchased at their face value. There is no limit on the amount that can be purchased.
The interest on Series HH bonds is fixed on the date of purchase and will continue to accrue for 20 years. The interest is deposited directly into the owner’s checking or savings account. Series HH Savings Bonds must be held for a minimum of six months. Like Series I and EE, the interest on Series HH bonds is not subject to State and local taxes. It is, however, subject and State and local inheritance, gift and other excise taxes.
Thanks to Joe Goertz for contributing this article to our Bonds blog:
You will find more from this author at: finance-mag.com
10 Reasons Why The Market-Correction Triggered Money Flow Into Dollar Denominated Bonds Is The Wrong Move
March 25, 2009 by How Savings Bonds Work
Filed under About Bonds
Many people think of any type of dollar denominated bonds, whether they are U.S. corporate bonds or U.S. Treasury bonds as a safe place to park your money for reliable sources of income stream. In fact, the U.S. Treasury Department on their own website, even tout U.S. Treasury Securities as a “great way to invest and save for the future.”
Many people believe this nonsense because they are advised of this by a horde of financial consultants that have zero understanding of how the political-corporate-banking triumvirate operates, and how this financial triumvirate has produced a most unattractive likely scenario for dollar-denominated bonds going forward from 2007. Many people think of U.S. Treasury bonds as safe because of the “federal guarantee”. The ten reasons below render that federal guarantee irrelevant.
And don’t think this doesn’t affect you just because you aren’t American. Non-Americans aggregately hold a lot more U.S. dollars in this world than Americans do. If you are one of those misled people, American or non-American, reading the below ten reasons can save you a lot of grief in the future.
(1)The often repeated financial consultant statement that bonds are a “safe place” to park your money, especially if you are older, is a myth.
Who cares if you earn a 5% revenue stream from bonds if the currency they are denominated in loses 15% in value over that same time span? Think of the losses of the U.S. dollar versus other major global currencies in 2006. An 11% decline against the Euro; An 11% decline against the New Zealand dollar; A whopping 14% decline versus the Pound Sterling; and a incredulous 15% against the Thai Baht ( I mention the New Zealand dollar and Thai baht because these currencies are commonly held currencies in Asian currency baskets offered by major banks as a hedge against the falling dollar). If you hold dollar denominated bonds with a 5% income stream and your dollars just lost 15% of purchasing power, are you really happy with a net 10% loss?
(2)Many of those in the retirement phase of their lives are convinced to invest in longer maturity bonds because of poorer yields of short-term bonds. This strategy comes with risk because of the following.
As the Euro gradually replaces the U.S. dollar as the international currency of choice, the longer maturity necessary to ensure a return of face value on bonds presents a significantly greater risk.
(3)As interest rates go up, the face value of bonds go down. Although Wall Street strongly expects the U.S. Federal Reserve to cut interest rates soon to stimulate a faltering U.S. economy, this is how I see it.
At some point and time, the U.S. Federal Reserve will try to block global flight from the U.S. dollar by propping up interest rates, not cutting them. Here you suffer twice. Once from a loss of purchasing power and twice, from a devaluation of the face value. See number (2) why holding a long term bond until maturity may not be an option. And even if the Federal Reserve keeps in line with Wall Street expectations, that’s bad news too. Even if interest rates stay flat or go down, then the dollars that your bonds are denominated in lose value. This is pretty much a lose-lose situation and not one that I want any part of.
(4)As the dollar loses value over time, banks and other financial institutions will increase interest rates on loans and other financial instruments to compensate for the heavy losses they are incurring on a weakening dollar.
As your costs of doing business and living rise, yields from bonds won’t cut it anymore. In addition to the three strikes listed above, this is strike four. Need more reasons? Then continue reading.
(5)As the massive yen carry trade continues to unwind, and the Bank of Japan takes increasing measures to strengthen the Yen as the Japanese economy continues emerging from its recession, the strengthening of the Japanese Yen in addition to the Pound Sterling and Euro will threaten dollar supremacy.
Last year as every single major world currency pounded the dollar, the Yen was just about flat against the dollar. In the coming year to eighteen months, it will be the Yen’s turn to pound the dollar.
(6)While most people think that there has been no further attack on the U.S. by terrorists since 9/11, there has been a far more devastating ongoing attack - an ongoing economic war.
Though this fact is not discussed at all in the mainstream media, Osama bin Laden’s has repeatedly stated that his number one goal to topple the U.S. as an economic power. The attacks on the Twin Towers were symbolic of that goal. However, if he achieves his goal of debilitating the U.S. economy through the draining of U.S. resources in the current prolonged Iraqi war, this would make him far happier than any overt attack he could accomplish.
(7)In response to (6), the U.S. Federal Reserve has expanded the dollar money supply to provide funding for the war.
With no end in sight to this war, we can expect the dollar money supply to continue to expand, therefore placing more downward pressure on the dollar. No matter that U.S. Secretary of Treasury Hank Paulson publicly declared that the U.S. economy is strong and in good shape in March of 2007. This simply is not true.
(8)The U.S. has no powerful allies to keep the dollar strong.
Don’t underestimate the importance of the above statement. With protectionism sentiment growing stronger among the newly elected Democratic U.S. Congress, the U.S. certainly has no friends in China, the largest holder of dollar denominated debt at over $1 trillion. Certainly when the U.S. Congress moved to block the Chinese state-sponsored bid for U.S. oil giant Unocal because they viewed such an acquisition as a threat to national security, the Chinese government certainly viewed this action as hostile to their business interests. Certainly, this incident will remain fresh in the minds of Chinese government officials when U.S. Secretary of Treasury Hank Paulson or U.S. Federal Reserve Chairman Ben Bernank make continued please to the Chinese government for assistance.
(9)The largest holders of Petrodollar reserves include Russia, Venezuela, Iran and other Middle Eastern countries.
Read that list again. There is not a single nation strongly friendly to the U.S. on that list.
(10)When people finally realize that (1) through (9) are not only true, but inevitable, there may be a flight from the bond market, causing bond prices to tumble.
When you realize the shakiness of your situation as a dollar-denominated bond holder, think about this? Don’t you think foreign governments and wealthy private institutions and individuals, holders of dollar-denominated assets in massively greater quantities, realize the same? When they realize the facts that I’ve laid out above, their aggregate actions will reflect poorly upon dollar denominated bonds as well.
Thanks to J.S. Kim for contributing this article to our Bonds blog:
Many people believe this nonsense because they are advised of this by a horde of financial consultants that have zero understanding of how the political-corporate-banking triumvirate operates, and how this financial triumvirate has produced a most unattractive likely scenario for dollar-denominated bonds going forward from 2007. Many people think of U.S. Treasury bonds as safe because of the “federal guarantee”. The ten reasons below render that federal guarantee irrelevant.
And don’t think this doesn’t affect you just because you aren’t American. Non-Americans aggregately hold a lot more U.S. dollars in this world than Americans do. If you are one of those misled people, American or non-American, reading the below ten reasons can save you a lot of grief in the future.
(1)The often repeated financial consultant statement that bonds are a “safe place” to park your money, especially if you are older, is a myth.
Who cares if you earn a 5% revenue stream from bonds if the currency they are denominated in loses 15% in value over that same time span? Think of the losses of the U.S. dollar versus other major global currencies in 2006. An 11% decline against the Euro; An 11% decline against the New Zealand dollar; A whopping 14% decline versus the Pound Sterling; and a incredulous 15% against the Thai Baht ( I mention the New Zealand dollar and Thai baht because these currencies are commonly held currencies in Asian currency baskets offered by major banks as a hedge against the falling dollar). If you hold dollar denominated bonds with a 5% income stream and your dollars just lost 15% of purchasing power, are you really happy with a net 10% loss?
(2)Many of those in the retirement phase of their lives are convinced to invest in longer maturity bonds because of poorer yields of short-term bonds. This strategy comes with risk because of the following.
As the Euro gradually replaces the U.S. dollar as the international currency of choice, the longer maturity necessary to ensure a return of face value on bonds presents a significantly greater risk.
(3)As interest rates go up, the face value of bonds go down. Although Wall Street strongly expects the U.S. Federal Reserve to cut interest rates soon to stimulate a faltering U.S. economy, this is how I see it.
At some point and time, the U.S. Federal Reserve will try to block global flight from the U.S. dollar by propping up interest rates, not cutting them. Here you suffer twice. Once from a loss of purchasing power and twice, from a devaluation of the face value. See number (2) why holding a long term bond until maturity may not be an option. And even if the Federal Reserve keeps in line with Wall Street expectations, that’s bad news too. Even if interest rates stay flat or go down, then the dollars that your bonds are denominated in lose value. This is pretty much a lose-lose situation and not one that I want any part of.
(4)As the dollar loses value over time, banks and other financial institutions will increase interest rates on loans and other financial instruments to compensate for the heavy losses they are incurring on a weakening dollar.
As your costs of doing business and living rise, yields from bonds won’t cut it anymore. In addition to the three strikes listed above, this is strike four. Need more reasons? Then continue reading.
(5)As the massive yen carry trade continues to unwind, and the Bank of Japan takes increasing measures to strengthen the Yen as the Japanese economy continues emerging from its recession, the strengthening of the Japanese Yen in addition to the Pound Sterling and Euro will threaten dollar supremacy.
Last year as every single major world currency pounded the dollar, the Yen was just about flat against the dollar. In the coming year to eighteen months, it will be the Yen’s turn to pound the dollar.
(6)While most people think that there has been no further attack on the U.S. by terrorists since 9/11, there has been a far more devastating ongoing attack - an ongoing economic war.
Though this fact is not discussed at all in the mainstream media, Osama bin Laden’s has repeatedly stated that his number one goal to topple the U.S. as an economic power. The attacks on the Twin Towers were symbolic of that goal. However, if he achieves his goal of debilitating the U.S. economy through the draining of U.S. resources in the current prolonged Iraqi war, this would make him far happier than any overt attack he could accomplish.
(7)In response to (6), the U.S. Federal Reserve has expanded the dollar money supply to provide funding for the war.
With no end in sight to this war, we can expect the dollar money supply to continue to expand, therefore placing more downward pressure on the dollar. No matter that U.S. Secretary of Treasury Hank Paulson publicly declared that the U.S. economy is strong and in good shape in March of 2007. This simply is not true.
(8)The U.S. has no powerful allies to keep the dollar strong.
Don’t underestimate the importance of the above statement. With protectionism sentiment growing stronger among the newly elected Democratic U.S. Congress, the U.S. certainly has no friends in China, the largest holder of dollar denominated debt at over $1 trillion. Certainly when the U.S. Congress moved to block the Chinese state-sponsored bid for U.S. oil giant Unocal because they viewed such an acquisition as a threat to national security, the Chinese government certainly viewed this action as hostile to their business interests. Certainly, this incident will remain fresh in the minds of Chinese government officials when U.S. Secretary of Treasury Hank Paulson or U.S. Federal Reserve Chairman Ben Bernank make continued please to the Chinese government for assistance.
(9)The largest holders of Petrodollar reserves include Russia, Venezuela, Iran and other Middle Eastern countries.
Read that list again. There is not a single nation strongly friendly to the U.S. on that list.
(10)When people finally realize that (1) through (9) are not only true, but inevitable, there may be a flight from the bond market, causing bond prices to tumble.
When you realize the shakiness of your situation as a dollar-denominated bond holder, think about this? Don’t you think foreign governments and wealthy private institutions and individuals, holders of dollar-denominated assets in massively greater quantities, realize the same? When they realize the facts that I’ve laid out above, their aggregate actions will reflect poorly upon dollar denominated bonds as well.
Thanks to J.S. Kim for contributing this article to our Bonds blog:
J.S. Kim is the founder and managing director of SmartKnowledgeU?, LLC. Please visit the SmartKnowledgeU? website to learn the safest places to invest money and how to achieve financial freedom
Online Trading: Different Types of Bonds
March 1, 2009 by How Savings Bonds Work
Filed under About Bonds
Investing in bonds is very safe, and the returns are usually very good. There are four basic types of bonds available and they are sold through the Government, through corporations, state and local governments, and foreign governments.
The greatest thing about bonds is that you will get your initial investment back. This makes bonds the perfect investment vehicle for those who are new to investing, or for those who have a low risk tolerance.
The United States Government sells Treasury Bonds through the Treasury Department. You can purchase Treasury Bonds with maturity dates ranging from three months to thirty years.
Treasury bonds include Treasury Notes (T-Notes), Treasury Bills (T-Bills), and Treasury Bonds. All Treasury bonds are backed by the United States Government, and tax is only charged on the interest that the bonds earn.
Corporate bonds are sold through public securities markets. A corporate bond is essentially a company selling its debt. Corporate bonds usually have high interest rates, but they are a bit risky. If the company goes belly-up, the bond is worthless.
State and local Governments also sell bonds. Unlike bonds issued by the federal government, these bonds usually have higher interest rates. This is because State and Local Governments can indeed go bankrupt – unlike the federal government.
State and Local Government bonds are free from income taxes – even on the interest. State and local taxes may also be waived. Tax-free Municipal Bonds are common State and Local Government Bonds.
Purchasing foreign bonds is actually very difficult, and is often done as part of a mutual fund. It is often very risky to invest in foreign countries. The safest type of bond to buy is one that is issued by the US Government.
The interest may be a bit lower, but again, there is little or no risk involved. For best results, when a bond reaches maturity, reinvest it into another bond.
Thanks to Nicholas Tan for contributing this article to our Bonds blog:
The greatest thing about bonds is that you will get your initial investment back. This makes bonds the perfect investment vehicle for those who are new to investing, or for those who have a low risk tolerance.
The United States Government sells Treasury Bonds through the Treasury Department. You can purchase Treasury Bonds with maturity dates ranging from three months to thirty years.
Treasury bonds include Treasury Notes (T-Notes), Treasury Bills (T-Bills), and Treasury Bonds. All Treasury bonds are backed by the United States Government, and tax is only charged on the interest that the bonds earn.
Corporate bonds are sold through public securities markets. A corporate bond is essentially a company selling its debt. Corporate bonds usually have high interest rates, but they are a bit risky. If the company goes belly-up, the bond is worthless.
State and local Governments also sell bonds. Unlike bonds issued by the federal government, these bonds usually have higher interest rates. This is because State and Local Governments can indeed go bankrupt – unlike the federal government.
State and Local Government bonds are free from income taxes – even on the interest. State and local taxes may also be waived. Tax-free Municipal Bonds are common State and Local Government Bonds.
Purchasing foreign bonds is actually very difficult, and is often done as part of a mutual fund. It is often very risky to invest in foreign countries. The safest type of bond to buy is one that is issued by the US Government.
The interest may be a bit lower, but again, there is little or no risk involved. For best results, when a bond reaches maturity, reinvest it into another bond.
Thanks to Nicholas Tan for contributing this article to our Bonds blog:
Nicholas Tan has been involved in Article Writing, providing Free Articles, Internet Marketing, SEO, Adwords, & Adsense for more than 5 years and designs and develops websites. Submit your free articles and get your articles noticed! Get your Free Articles here! Submit Articles! We provide free articles and information. Check us out at Free Articles!
