Government savings bonds?

define.
how it works
3 PROS & 3 CONS
risks involved
better for a long term or a short term investment?

government savings bond. Small denomination bonds issued by the U S government for individual investors and savers, with tax deferred interest payments. There are currently 2 version EE bonds and I bonds. EE bonds have a fixed interest rate. I bonds have a two part interest rate, one fixed and one indexed to inflation. However, the government decides what the inflation rate is and they do like to low ball it.

The interest on these bonds is paid when the bonds are cashed in, not semi-annually as with normal government bonds.

How they work? EE bonds are purchased at a discount to face, but that is really a leftover from earlier years. The face amount and discount amound are really irrelevent. The earn interest for a period of up to 30 years. They can be cashed at any time after 5 years without penalty. They can be cashed after 1 year with a 3 month interest penalty. They can be purchased at most banks or directly from the government over the internet.

3 pros:

1. not subject to state and local taxes
2. interest is tax deferred until payed
3. have special features allowing tax exclusion when used for education
4. I bonds are inflation protected.

3 cons

1. not negotiable (you can not sell them(
2. very low interest rate. Does not keep up with inflation
3. Can't think of a 3rd, but those two above are bad enough

Risks involved. EE bonds are not inflation protected. Interest rate does not keep up with inflation.

Not really good for either short term or long term, but better for long term than short term because of the interest penalty when holding less than 5 years.