June 20, 2024

Treasury Bonds and Savings Bonds: How Are They Different?

The United States Treasury’s Bureau of Public Debt is responsible for issuing various debt instruments, including bonds, notes, and bills, in order to finance the national debt. Moreover, a section of the agency issues and provides U.S. savings bonds. People love to put their money into U.S. savings bonds and Treasury bonds. During market hours, you can see Treasury bonds traded on public marketplaces every day. There are some similarities and some differences between the two investment types.

Purchase
The original sale of Treasury bonds occurs at auction four times a year, and investors have the option to exchange these bonds on the secondary market. Multiple investors can purchase and resell the same bond before it matures. Savings bonds do not require a specific sale date to earn interest. In their place, investors can purchase them at any time during the year, with a maximum annual purchase per investor. No third party, including a bank or other financial institution, may sell or buy savings bonds on behalf of the U.S. Treasury. The registered person receives the money when a savings bond matures. You can purchase Series I Savings Bonds with an American tax refund.

A Minimum Investment Requirement
Auctions offer Treasury bonds for as little as $100 or as much as $5 million. You can purchase a savings bond for any amount, ranging from $25 to $5,000. In accordance with TreasuryDirect, there are seven different face value options for purchasing Paper I Bonds, starting at $50. Six additional denominations are $75, $100, $200, $500, $1,000, and $5,000. Another option is to buy EE Savings Bonds in $25 or more increments, with a maximum purchase limit of $5,000 per year, or in penny increments. To illustrate the point, a potential investor has the option to buy a $25.50 savings bond online.

Earnings
Interest on either bond type is not taxable at the state or municipal level, but it is taxable at the federal level. An auction determines the interest rate that Treasury bonds will earn; this rate may change depending on market conditions. Additionally, twice a year, the Treasury establishes a schedule for setting interest rates on savings bonds. Savings bonds accrue interest on a monthly basis, with compounding occurring twice a year.

Development and safety
Treasury bonds typically have a 30-year maturity. The frequent exchange of Treasury bonds on secondary markets makes them an excellent investment. Savings bonds, on the other hand, cannot be traded privately. The federal government’s full faith and credit, which can borrow money from other sources and impose taxes, virtually eliminates risk in a U.S. Treasury security. However, if you don’t hold on to your Treasury bonds until they mature, you could lose money due to interest rate risk.

A second chance
The holding period for savings bonds is not mandatory. An investor will pay three months’ interest if they redeem their savings bond less than five years after purchase. A bank will redeem them using their current market value. Treasury bonds pay interest to bondholders semiannually, in the form of coupons and principal upon maturity. Bondholders have the option to sell treasuries at any time when they find a buyer.

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