Every government needs funds. It can raise funds by taxation, but it can also borrow on the capital markets, or from individual citizens. The US Treasury issues various kinds of bonds to finance the government. Some are issued to the markets as Treasury Bonds or Bills, and can be traded - often by institutional investors such as mutual funds and retirement funds. Others are sold direct to individual investors as Savings Bonds.
Department of Treasury Savings Bonds were introduced in 1935 to encourage the public to participate in financing the government. Since investors can put small amounts of money (as little as USD 25) into Department of Treasury Savings Bonds, instead of the USD 1,000 plus needed to invest on the bond market, they appeal to less wealthy investors.
Investors in Department of Treasury Savings Bonds also don't need to have a broker, since they can deal directly with the Treasury. When they redeem the bonds they will get their money back from the Treasury instead of having to sell through a broker. They can also buy savings bonds through their bank, in paper form, as well as dealing online with the Treasury. Department of Treasury Savings Bonds are also available through a payroll savings plan.
Department of Treasury Savings Bonds are the safest investment available to the small investor. They are backed by the government's guarantee, so there is no risk of the issuer going bankrupt, as there is with corporate bonds or bank deposits. However, they do not offer the highest rate available on savings - investors who want a higher rate will need to consider taking some risk.
Two types of savings bonds are available, Series EE and Series I. Series EE savings bonds pay a fixed rate of interest, while Series I pay a rate which is adjusted in line with the rate of inflation.
There are limits on how many savings bonds an investor can buy each year. Each individual can buy only USD 5,000 online and USD 5,000 paper form savings bonds of each type (EE and I) in a given year.
Department of Treasury Savings Bonds are long term investments with maturities of 20 to 30 years. This makes them a great method of long term saving. However they do not pay interest during the term of the investment - they only pay out when they are redeemed. They offer significant tax advantages; income is exempt from state and local taxes, and federal tax on the interest can be deferred until the bond is cashed in.