How does a saving bond work?
Okay, I want to be a successful investor when I grow up. I'm interesting in stock, bond, and real estate investment. So I have been doing some research lately and I got a basic idea of what stock and real estate investment are.
Now, I don't quite understand saving bond investment. I did some research and basically what I got is that it works like a saving account. HOW? Do you just put your money into the bank and rent it to the big business? Then, what is the difference between a saving bond and a saving account (which you basically rent the money to the bank and let it lose value as the inflation rate goes up)? What kind of business are you renting the money to? Big business like Microsoft, McDonald, Walmart? Or small business that no one ever heard of? Also, people said that a saving bond is safer than stock, but it's still risky. How? Are you saying that the businesses I'm renting money to will go bankrupt easily (I don't think big business will ever get bankrupted "that" easily)? If so, does FDIC compensate you? How many percent of interest should I expect to earn (in general)? Lastly, let's say I put in like a million dollar and it earns 10% interest yearly, which is 100 thousand dollar. Am I allowed to just take out the interest and use it for living? If I sell my bond (I know you can't do it within 6 months of purchase), can I sell just a fraction of it instead of selling everything I own?
I'll appreciate for anyone who can answer my confusions!
- cactusgeneLv 77 years agoFavorite Answer
A savings bond is kind of similar to a savings account. But you do not lend money to corporations, but rather you lend that money to the Federal government, so you don't have to worry about its safety. You can buy those bonds at a local bank or online. They are issued in as small a denomination as $25. The issue price on this bond is $18.75 and it matures years later at $25, so the interest accrues and is paid at maturity. And yes you can redeem the bond after at least 6 months, but you won't get $25 for it.
- RaysorLv 77 years ago
A savings bond is a form of debt. It differs from savings account in that it has a fixed term. It is not listed on a stock exchange therefore cannot be traded. A loan to business is called a corporate bond, usually with fixed term and fixed coupon (but not always).
Then government bonds, municipal (local authority) bonds. Also Debentures, Secured loans etc. which are secured against some form of asset. It is all lending/borrowing in one form or another, wheres stock & share investment is equity (ownership) investment.
A government/corporate bond could go into default either as to capital or interest payment. A savings bond will usually be entitled to some compensation scheme.
Interest rates are low at the moment, like 1.5% or something. To get higher return you need to commit funds for longer (yield curve) or take higher risk (going all the way to junk bonds).
Look at investment grade corporate bonds (4.5%), non-investment grade corporate bonds (5-6%).
If the bond is listed (not savings bonds) then you can sell all/part at any time you like (as long as there are buyers/liquidity) but the market price is variable.
Usually the interest accrrues daily so you don't lose out if you sell before the coupon is paid.