Book-Entry Savings Bond
What it is:
How it works/Example:
Savings bonds are bonds issued by the U.S. government at face values ranging from $50 to $10,000. Although there are some older savings bonds out there that are in paper form, the U.S. Treasury issues its new securities in book-entry form.
Investors have three book-entry options for holding their savings bonds: TreasuryDirect, Legacy Treasury Direct, and the commercial book-entry system (also known as the Treasury/Reserve Automated Debt Entry System, or TRADES). The first two systems are operated directly by the Treasury, and investors who use the system buy and sell directly from the Treasury. The investor receives an account statement from the Treasury.
The commercial book-entry system is a system whereby the investor's ownership of the savings bond is only reflected in the investor's account records at his or her financial institution, brokerage firm, or dealer. Unlike the Treasury systems, there is often a fee associated with using the commercial book-entry system, but it lets investors use the securities as collateral for other transactions within the firm. Also, the identity of the bondholder only appears on the institution's records, and as such investors usually have no direct recourse against the U.S. Treasury or the Federal Reserve Bank regarding disputes about misplaced securities.
Why it matters:
Savings bonds are known for their simplicity, tax advantages, liquidity, and low risk. They were one of the last securities still routinely issued in paper form, but the advent of book-entry bonds has streamlined and reduced the cost of the process of buying and selling savings bonds for both investors and the government. However, holding these bonds in electronic form is sometimes unattractive to investors who want physical evidence of ownership.
In many cases, investors can get a paper receipt for their purchase, however, and this is often espirally valuable to those who hold the bonds via the commercial book-entry system.