However,
there are other savings vehicles suitable for those who want to
invest their cash for the medium to long term but who do not want to
risk losing their capital.
One
of the most secure forms of investment are the savings bonds issued
by the government, which are available to purchase either as a
savings asset or as a gift for another person.
Savings
bonds are provided by the federal government and act as a way for the
US to fund the debts it holds by borrowing money from the American
public.
There
are various type of investments available including fixed rate bonds as well as those offering a variable rate.
The
main types on offer are I and EE bonds that rack up interest during
the term of the investment. These do not become payable until
maturity.
The
fixed rate bonds available are primarily the I bonds that provide a
pre-agreed interest payment plus an additional amount set at a level
in excess of inflation. EE bonds can be fixed rate bonds but are also
available as a variable investment.
Bonds
can be purchased either via banks or online. Bonds purchased via
banks are only available in paper form while online banking offers an
electronic option.
Electronic
bonds are far more flexible and are available in any denomination of
$25. Paper savings bonds are slightly more fixed and offer the option
to purchase $50, $75, $100, $200, $500, $1,000, $5,000 or $10,000.
Electronic
and paper bonds work in two different ways. Electronic bonds begin to
earn interest immediately and start at the worth of their face value.
Paper bonds, on the other hand, start off with a value worth half of
their face value and reach maturity when the interest payments bring
the value up to their stated amount.
Electronic
savings bonds also have another very unusual feature. Despite having
a maturity date, they can go on earning interest for up to 30 years.
Owners
of the bonds are able to use the Treasury Direct website to track the
value of their investment and see when their bond will stop earning
interest.
As
well as being a safe haven in difficult economic times, because of
the protection of the federal government, savings bonds also have
other benefits.
The
interest on the various types of bonds can be deferred until the
maturity date or earlier encashment, at which point it is not subject
to state tax, unlike other savings accounts.
While
savings bonds undoubtedly offer investors significant benefits, if
they are cashed in before they have been invested for five years a
sacrifice equivalent to three months of interest will be made.
In
addition, as a fixed rate bond locks in the interest payable, if the
economic outlook changes during the investment period and interest
rates rise, the bond can become less competitive.
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