Investing in savings bonds
When investing in savings bonds, you need to understand the following terms and how to find them.
- Face value
- Cost of the savings bonds
- Redemption value
- Interest earned
Keep in mind that savings bonds are usually sold by the United States government. You just need to pay 50% of the face value.
The face value is the original price of the savings bonds. Saving bonds can be purchased with a face value ranging from 50 to 10,000.
The cost of the saving bonds is 50% of the face value.
The redemption value is the value of the bond when it is redeemed. This is usually based on how long you invest and how much the government is willing to pay. See redemption table below. You will need to find the redemption value before you can compute the interest you will earn. The face value is used when computing the redemption value.
The way we compute the interest earned when investing in savings bonds is different than the way we compute interest in bonds. In order to find out how much interest you will earn, you need to subtract the cost of the savings bonds from the redemption value.
Interest earned = redemption value − cost of savings bonds
A couple of examples showing how investing in savings bonds work
A chart similar to the one above could be used when computing the redemption value.
Example #1
Say for instance, you buy a 1000 dollars bond and redeemed it 4 years later. Using the redemption table shown above, find the redemption value of the bond and the amount of interest you will earn.
Here is how you can compute the redemption value:
Redemption value = (redemption value of 100 dollars after 4 years) × (number of 100 dollars in face value).
Since 1000/100 = 10, the number of 100 dollars in face value is 10.
60.21 × 10 = 602.1
The redemption value is 602.1 dollars
Cost of savings bonds = face value × 50%
Cost of savings bonds = 1000 × 0.50
Cost of savings bonds = 500
Interest earned = redemption value − cost of savings bonds
Interest earned = 602.1 - 500
Interest earned = 102.1
The interest earned is 102.1 dollars
Example #2
Say for instance, you buy savings bonds in the amount of 3 million dollars and redeemed it 5 years later. Using the redemption table shown above, find the redemption value of the bond and the amount of interest you will earn.
Here is how you can compute the redemption value:
Redemption value = (redemption value of 100 dollars after 5 years) × (number of 100 dollars in face value).
Since 3000000/100 = 30000, the number of 100 dollars in face value is 30000
62.50 × 30000 = 1875000
The redemption value is 1875000 dollars
Cost of savings bonds = face value × 50%
Cost of savings bonds = 3000000 × 0.50
Cost of savings bonds = 1500000
Interest earned = redemption value − cost of savings bonds
Interest earned = 1875000 - 1500000
Interest earned = 375000
The interest earned is 375000 dollars