U.S. Bonds

When you buy U.S. bonds, you're lending money to the federal government. Bonds were used during World War I and II as a way for the federal government to raise money for fighting the wars. Still popular today, U.S. bonds can be purchased online and through payroll savings plans for electronic savings bonds in TreasuryDirect.

Two kinds of U.S. Bonds

• EE Bonds. These are discount bonds. When you buy these bonds, you pay only half their "face value", the value printed on the bond. So, for example, you pay $50 for a $100 bond. Each year that you keep the bond, its value increases as interest adds up. Even after the bond reaches the value printed on it, the bond will continue to earn interest. Bonds earn interest for 30 years from the date they were issued.
• I Bonds. These bonds are sold at their face value ($50 for a $50 bond). They earn interest and can be cashed in to pay for college. They are tax-free. Interest rises and falls – every six months, interest rates change.

Safety

The money you invest in bonds is backed by the full faith and credit of the federal government. To learn about safety, risk, and interest rates, look at the Risk/Reward Pyramid.

Liquidity

How free are you to take your money out? This is long-range investing. Your money is tied up for years.

Return

Interest rates are lower than some other investments because there's lower risk with bonds.