Savings bonds are securities that can only be issued by the Treasury and may not be traded, resold, or given to anyone other than the person named on them. Series EE Savings Paper Bonds are the most popular Treasury issue, partially because they can be purchased pretty cheaply. They're sold for half the face value, in denominations ranging from $50 up to $10,000. Interest is calculated as 90 percent of six-month five-year Treasury Securities yields. It accrues monthly and is compounded semiannually.
Savings bonds mature at varying dates, depending upon the date of issue, and they earn interest for 30 years. They can be redeemed once they have been held for 12 moths, but if you hold them for fewer than five years from the issue date, you'll be hit with an early redemption penalty equal to three months' earned interest.
You receive your earnings as well as the bond's full face value upon maturity and must pay federal tax on those earnings upon redemption. An exception: They are exempt from federal tax if you use the earnings to pay for qualified higher education expenses and meet the income guidelines. All savings bond earnings are exempt from state and local income taxes.
They're easy to buy, with a purchase price as little as $25, either through an online account at TreasuryDirect, via automatic withdrawal with the payroll Savings Plan, or at almost any bank.
Corporate Bonds - decent income, low risk
The Patriot Bond is the Series EE Savings Bond with a patriotic emblem. It was introduced after 9/11, after many Americans expressed a desire to support the fight against terrorism. The reality is that the proceeds from all Treasury securities go into a general fund and are not specifically earmarked for antiterrorism efforts, although some of the money ends up being apportioned for that cause. Unlike traditional Series EE Savings Bonds, these cannot be purchased through Payroll Savings Plans, as they aren't set up to inscribe the Patriot emblem.
The I bond was specifically created to help minimize the effects of inflation. It has two components: a fixed rate of return and a variable rate that represent a hedge against inflation, as measured by the Consumer Price Index. I-bonds are sold at face value: A $500 bond costs $500.
