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Governments issue government bonds to raise money and fund debt. When one buys a government bond, they are actually lending money to the government in return for the promise of repayment at a later date, in addition to a specified annual return rate. Bonds are also called securities.
The US government currently issues EE and I bonds. (Note - HH bonds were issued up to August 31, 2004, and there are still many that have not matured.)
The value of a government bond varies. EE bonds for instance, are sold at 50% of their face value, and do not reach final maturity until 30 years from the date of issuance. The bond collects interest monthly and is paid when the bondholder cashes in the bond. These bonds reach maturity at about 17 years, although they can be held as many as 30 years and continue to collect interest. Bonds issued before May 2005 have interested reassessed every six months. At that time, the interest is calculated at 90% of the average five-year Treasury yield for the previous six months. Bonds issued post May 2005 deliver a fixed rate of interest for the life of the bond. These bonds are guaranteed by the Treasury to reach face value after 20 years.
HH bonds are discounted and mature at face value. These bonds are non-marketable and pay interest semi-annually.
I bonds are issued at face value. The yield is variable on these bonds, based on inflation. The interest rate is comprised of two factors: 1) a fixed rate that remains constant throughout the life of the bond, and 2) a variable rate that is reset every six months that begins from the date of purchase and is based on the current inflation rate. The new rates occur every May 1 and November 1 of each year. While the Treasury Department determines the fixed rate, the variable factor is based on the Consumer Price Index from a half-year period ending one month before the reset time. The purchase of I bonds is limited to individuals at $5000 per person per year, and the bonds cannot be redeemed prior to a 5-year time limit, or the buyer must pay a penalty equal to 3 months of interest. |
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