By the time you turn twenty, you may have acquired a few of the government-issued variety. These represent childhood savings bonds, given to you by your family as gifts. They generally mature when you get older, meaning that they are available to be redeemed. Some people wait until they buy their first car or start college to redeem them (sometimes not by choice, thanks Mom). But some people choose to hang on to them.
In the past couple years, people have been choosing to let their bonds collect dust rather than cashing them in. According to the Bureau of the Public Debt, some $16 billion in matured government savings bonds are ready to be redeemed. So why haven’t people turned them in? There may be a few reasons.
The U.S. Piggy Bank
Once a bond reaches maturity, it will still accrue interest. So some people hold on to the bonds until they need the cash. Some may say that it is a form of savings account, supported by government debt. While others may argue that it is an essential part of an investment portfolio.
Government bonds have historically been viewed as a “safe” haven for cash in weak economic times. People feel that it is safe to assume that the government will not default on their debt, unlike some other types of bonds, thus making it a choice interim purchase until a more preferable investment comes around.
The “Other” Debt
Bonds are issued by a variety of entities, with the U.S. Government only representing one type. Others would include the U.S. Treasury, state and local municipalities (muni’s) and corporations. Regardless of who issues them, they are all debt. Not yours or mine, but the debt of the entity that issues them. It is simply another way to raise money, whether it is for the government or for a business. Thus, each type of bond is evaluated for different levels of risk and given a rating (like A, B or C, but it varies by the rating agency), with the riskiest simply being labeled as “junk-bonds.”
People buy bonds for a variety of reasons. As mentioned above, it could be because you need a “safe” place to store value during a weak market, so you may choose a less-risky bond such as the U.S. Government savings bonds. Or you may be looking for something to diversify your investment portfolio (always a good idea) to minimize your exposure to the stock market incase it goes bad. In this case, you may choose to buy Treasury securities because they have a shorter maturity date.
Some people are willing to go outside the “safe” haven of government bonds to buy muni-bonds or corporate bonds. These generally have a higher rate of return (higher interest) than their government counterparts because buyers expect to be compensated for the higher risk that the issuer will default. And if you were living life on the edge, perhaps you would be willing to take on even more risk and buy a “junk-bond,” which will have an even higher interest rate to compensate you for the additional risk of default. Indeed the higher interest rates on these types of bonds are much more appealing, but make sure that whatever you choose you carefully consider the risks that you are taking and that it is the correct investment option for you.
How Much Are Mine Worth?
If you have corporate or muni-bonds, check with the issuer to find out how much they are worth, when they mature and what interest rate they are earning (also referred to as the coupon rate). Just don’t be surprised if you call about your “junk-bond” to find out that the company’s phone number is disconnected. You may have to consult a broker on the value, rather than contacting the company direct.
If you already have some government savings bonds, but don’t know when they matured or what interest rate they are earning, take a look at treasurydirect.gov. Dig out the old dust-covered bonds and type in the ID number. You may be surprised how much of that $16 billion that you are entitled to.
~K
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