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A Guide to Bonds: T-Bills, EE Savings Bonds, and I Savings Bonds (February 2024)

Dr. Fan Yang, Ph.D. Economics

© International Foundation for World Freedom

When it comes to investing, there are many options available, each with its own level of risk and potential return. If you're looking for low-risk investments that offer a safe place to park your money while earning interest, T-Bills, EE Savings Bonds, and I Savings Bonds are worth considering. In this article, we'll break down these three options and explain how they work in a simple and easy-to-understand manner.

1. T-Bills (Treasury Bills)

Treasury Bills, often referred to as T-Bills, are short-term debt securities issued by the U.S. Department of the Treasury. They are considered one of the safest investments available because they are backed by the full faith and credit of the U.S. government.

Think of a Treasury Bill as a short-duration loan you extend to the government. When the term of the T-Bill concludes, the government repays your initial investment in full. These bills come with maturities spanning from four weeks to 52 weeks. Though commonly sold in $100 denominations, larger ones can fetch up to $10 million through non-competitive bids.

T-Bills are sold either at a discount or at par (face value). Upon maturity, you receive the T-Bill's face value, while the difference between your initial purchase cost and its face value constitutes your profit. You can hold onto a T-Bill until its maturity, collecting its full face value, or choose to sell it earlier on the secondary market to access funds before maturity. While the interest earned from T-Bills is exempt from state and local taxes, it remains subject to federal income tax.

Here's How to Purchase T-Bills through TreasuryDirect:

  1. Log into your TreasuryDirect account.

  2. Click on “BuyDirect” in the top navigation bar.

  3. Choose “Bills” under “Marketable Securities.”

  4. Select your preferred term, auction date, purchase amount, and reinvestment choice (if desired).

T-Bills are celebrated for being one of the safest investment options available. They ensure a predictable and steady return, making them particularly appealing to risk-averse investors. Yet, it's important to note that their returns might not match those of other investments, and their value could be influenced by fluctuations in interest rates.

2. EE Savings Bonds

The U.S. Department of the Treasury currently sells two types of savings bonds, the EE and I series. Both series have different interest rates, which are either fixed or change with inflation. 

Series EE savings bonds are a low-risk way to save money. They consistently accrue interest for 30 years, or until you redeem them earlier. Cashing in your EE bond is possible after 12 months. However, if you redeem it within the initial five years, you'll forfeit the last three months' interest. For instance, if you cash it after 18 months, you'll get the interest from the first 15 months. The government ensures that these bonds will double in value within 20 years, even if extra funds are added at the 20-year mark.

For Series EE Savings Bonds issued between May 1, 2023, and October 31, 2023, the present interest rate stands at 2.50%. New EE bonds are exclusively digital, requiring a TreasuryDirect account for purchase and management.

EE bonds accumulate interest monthly, with compounding every six months. This involves applying the bond's interest rate to a new principal every half-year. The new principal combines the previous principal and the interest earned over the preceding six months. Consequently, this process enhances your bond's value through both interest growth and an expanding principal.

To purchase an EE bond, you need a minimum of $25, or any higher amount down to the penny. For instance, you could buy an EE bond for $36.73. In a single calendar year and for a specific Social Security Number, you can procure up to $10,000 in EE bonds. This restriction pertains to the Social Security Number of the bond's first named person.

3. I Savings Bonds

Similar to EE Savings Bonds, I Savings Bonds are also issued by the U.S. government and offer a safe way to save money. Series I savings bonds protect you from inflation. With an I bond, you earn both a fixed rate of interest and a rate that changes with inflation. For instance, the Current Interest Rate for Series I Savings Bonds released from May 1, 2023, to October 31, 2023, is 4.30%. This comprises a fixed rate of 0.90% and an additional 3.4% due to inflation. Twice a year, the government establishes the inflation rate for the next half-year.

Series I savings bonds earn interest monthly. Interest is compounded semiannually, meaning that every 6 months the bond’s interest rate is applied to a new principal value. The new principal is the sum of the prior principal and the interest earned in the previous 6 months. Thus, your bond's value grows both because it earns interest and because the principal value gets bigger.

Similar to EE bonds, I bonds consistently accrue interest for a remarkable 30 years or until redemption, should you choose to do so earlier. You're eligible to cash in (redeem) your I bond after only 12 months. Nevertheless, if you opt to cash it in within five years, you forfeit the last three months' interest.

To purchase an electronic I bond, a minimum of $25 is required, or any larger amount down to the cent. Paper I bonds are available in denominations of $50, $100, $200, $500, or $1,000. In a single calendar year and per a specific Social Security Number, you can procure up to up to $10,000 in electronic I bonds, and up to $5,000 in paper I bonds (with your tax refund).

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