Many of us, at one time in our life, have thought of a savings plan or some form of financial investment. While some people think either the complexity of investments or the lack of funds with which to invest is a deterrent, this is the best opportunity to join the many Americans who have already started their savings plan by purchasing U.S. Government Savings Bonds. In this paper you will become aware of different types of bonds, how they work, how to get them, and who offers them. You will see that it does not take much to start saving and to secure your financial future.
A bond is an interest-bearing certificate sold by the government to raise money for capital expansion. An individual buying a bond is actually lending money to the government, and will receive a higher rate in return than what was originally paid for the bond. The bondholder can do a couple of things with the bond: he can either hold on to it until maturity or he can sell it to someone else. But the bondholder will cash in on the interest it has accrued.
A bond's face value, or principal, represents the amount of the original loan that is to be repaid on the bonds maturity date. The interest that the issuer agrees to pay each year is known as the coupon. This term is derived from the obsolete practice of attaching coupons, redeemable for interest payments, to the bottom of the bond certificate. The interest rate, or coupon rate, multiplied by the principal of the bond provides the dollar amount of the coupon. For example, a bond with an 8% coupon rate and a principal of $1,000 will pay an annual interest rate of $80. .
Several different kinds of bonds are available, some of which offer alternative interest structures. A zero coupon bond does not make periodic interest payments. The bondholder realizes interest by buying the bond substantially below the face value. A floating bond has an interest rate that is changed periodically according to an established formula.
