Saving Bonds - Your Guide To US, UK & Canadian Savings Bonds

buying a savings bond

saving bonds traderNow that we understand a little about savings bonds in broad terms, and how and when to consider them as a long terms investment, let's look at some of the terms you will come across when you begin to research the market before buying a savings bond. The term that always creates the most difficulty is yield, which can be very confusing. I have therefore devoted a whole page to this term which I hope explains this complex area clearly and simply ( well I hope so anyway!!)

As we are looking at bonds in the US, UK and Canada, I have explained terms in all three countries - some of these are common, others are unique to each country. In many cases they mean the same thing.  Let's start with the US savings bonds terms first, followed by the UK and Canada, which I hope will help you when you start buying a savings bond.

how to buy savings bonds

Par Value

Par value is also known as face or principal value and is the value you will receive at maturity. A $1000 par value bond will be worth $1000 on maturity. In other words your original investment!

Coupon

This is simply the interest rate of the bond. The rate is generally fixed over the life of the bond, although there are some that pay a variable rate. 

Maturity

This is the length of time before the par value is returned to the bond holder. This can be as short as a few months and as long as forty or fifty years. At maturity you will receive the par value for the bond - your original investment is returned.

Yield

Now yield is probably the most confusing part of savings bonds ( and many other types of bonds ) New investors are often surprised to learn that the price of a bond changes on a daily basis. In simple terms the yield is a figure that shows the return you get on your bond. However beneath this there are really three different types of yield, namely, nominal yield, current yield, and yield to maturity. This can be a complex area for new investors so I have devoted the next page of the site to explain this term in more detail with some examples, as it is the one aspect of saving bonds that is the least understood. I hope the explanation on the next page will make help you to understand it in simple terms - saving bonds yield.

purchasing savings bonds - US

AER

This the annual rate of interest, taking into account how often the interest is added to your account. The higher the AER, the better the return.

Capital

The overall amount of money you have invested

Fixed Interest

The interest rate is fixed for a set period. So you win if interest rates on other accounts later fall, but you will be stuck on a poor rate if interest rates rise. There are usually penalties to stop you switching to another account and you may not be able to get your money out early.

Variable Rate

The interest rate varies according the bank base rate set by the Bank of England

Guaranteed Equity

A form of saving bonds which is based on stock market performance, but the initial capital is still guaranteed, despite the performance of the market, hence the term guaranteed equity.

purchasing savings bonds - Canada

CSB

Canada Savings Bond

CPB

Canada Premium Bond

Debenture

A long-term debt instrument used by governments and large companies to obtain funds.

RRSP

Registered retirement savings plan is a wrapper for holding CSB's and CPB's

RRIF

Registered retirement income fund, is a wrapper for holding CSB's and CPB's

Now let's have a look at the savings bond term, 'yield', and I will try to explain this in simple terms so that you can apply it to any saving bond in any market, anywhere in the world.

Saving Bonds - next page