There are many kinds of bonds, but they all have a few things in common. Bonds earn interest that is either paid to you periodically or that accrues, meaning the interest is added to the bond, increasing its value. Another general characteristic is that the bond issuer that sold the bond to borrow money has to repay it on a specified date called the maturity. What happens when a bond matures depends on the type of bond and the price you paid for it.
A maturity date is like the due date on your rent or car payment because the bond issuer must pay off the bond on that date. Typically, bonds stop earning interest after they mature. Most bonds are registered to the owner by name and are held as either physical certificates or in book entry form, meaning the bond exists only as a bookkeeping entry. In either case, the issuing corporation or government instructs its bond agent to transfer the money to pay off bonds to the bond owners. An exception is the bearer bond. Bearer bonds are not registered to an identified owner. Consequently, you have to contact the issuer’s bond agent and follow the agent’s instructions to physically return the bond and receive payment when the bond matures. Issuing bearer bonds in the United States was prohibited in 1982, but there are still a few around and they are still issued in some foreign countries.
What You Get
When a bond issuer redeems a bond at maturity, you receive the face value of the bond and any interest that has accrued since the last time an interest payment was made. If the interest was not paid out periodically, you receive all of the interest that has accrued since the bond was issued. Suppose you own a bond with a face value of $5,000 and an annual 8 percent interest rate. The bond matures three months after the last interest payment. You get $5,000 plus another $100 in accrued interest for the last three months.
Interest on a bond is taxed as ordinary income unless the bond has tax advantages. For instance, Treasury bond interest is not subject to state or local income taxes. Interest on municipal bonds is often exempt from federal income tax and may be exempt from state and local taxes as well. When a bond is redeemed, you might have a capital gain or loss, depending on the price you paid for the bond. Suppose you bought a $5,000 face value bond at a premium price of $5,500. You get paid $5,000 when the bond matures, so you have a capital loss of $500. Conversely, if you bought the bond at a discount price of $4,500, you have a $500 capital gain. If you owned the bond for more than a year, the capital gain or loss is long-term. You must report any capital gain on your tax return and you may take a capital loss as a tax deduction.
U.S. Savings Bonds
U.S. savings bonds mature in 30 years. Savings bond interest accrues. When a savings bond matures, you get the principal amount plus all of the accrued interest. After the maturity date the bond stops earning interest. If you own savings bonds in electronic form through Treasury Direct, log on to your account and follow the instructions to redeem them. If you own paper savings bonds, you must present them at a bank or other financial institution for payment. For amounts over $1,000 you may need to mail savings bonds to a Treasury Retail Securities Site.