A bond as a stocking stuffer or present is not something people expect to receive as a gift during the holidays, especially younger children. Are bonds worth giving as a gift though? Or should another type of investment be considered over bonds?
Bonds are a debt in which an investor loans money to a corporate or government entity. The entity borrows the funds at a fixed interest rate. The money is returned to the investor when he or she chooses to cash in the bond. The amount received when cashed is based on the investment amount, interest rate, and length of time the bond was held. Different activities and projects are funded by companies, states, as well as U.S. and foreign governments to finance projects through bonds.
Series EE, as an example
There are many different kinds of bonds, including ones called Series EE savings bonds, which are set at a fixed rate of 0.1% for the next several years. A $3,000 investment would yield only three dollars after one year. With such a low return on investment, Series EE bonds don’t seem like promising investments, at a first glance.
“Because the Series EE savings bond is doubled at 20 years, the effective interest rate is just over 3.5% compounded semi-annually,’ said David Starck, a spokesman for the Department of the Treasury, Bureau of the Fiscal Service. He added, “The key is the bond must be held up to the original maturity of 20 years to get that yield. Otherwise, it will only get that 0.1% fixed rate in effect up until then.”
That means giving it to someone expecting to retire a couple of decades from now, or to a child that can use it to pay back college debt can prove rewarding. A $3,000 investment would yield 3.5% interest after 20 years, which could be very rewarding if held onto for at least five or more years. The key to cashing out on a Series EE savings bond is waiting for it to mature so that it yields a high interest rate.
Be careful not to redeem any bonds before they reach the five-year mark or else you will receive a penalty of the last three months of interest.
Bonds compared to CDs
Compare bonds to CDs as a short term investment and a certificate of deposit proves more rewarding. Look at a five-year CD from GE Capital Bank — it yields a 2.1% interest rate. Compare that to a short-term investment of a Series EE bond at 0.1%, and it’s clear the CD is a better option.
As a short-term investment, bonds may not prove as rewarding as a certificate of deposit. The true potential in a bond lies within its ability to greatly mature after so many years. The long term is what makes giving bonds as a gift valuable.