Understanding L Bonds: Definition, Features, and Overview
Learn about L Bonds, their meaning, key features, and an overview of these investment instruments.
L bonds, also known as L-shaped bonds, are a financial instrument issued by the U.S. Department of the Treasury. These bonds were introduced as part of the Savings Bond program and were issued between 1941 and 1982. They are no longer available for purchase, but some individuals still hold them.
Here's an overview of L bonds, their features, and how they worked:
Issuance Period: L bonds were issued in two series, L-1961 and L-1982. The L-1961 series was issued from 1961 to 1969, and the L-1982 series was issued from 1982 to 1984.
Purchase and Denominations: L bonds were available in face values ranging from $25 to $10,000. They could be purchased at a discount, meaning you paid less than the face value, and the bond would mature to its full face value over time.
Interest: L bonds earned interest for 30 years. The interest accrued semi-annually and was added to the bond's principal twice a year. This feature allowed the bond's value to increase over time.
Maturity: L bonds reached their face value when they matured after 30 years. After maturity, the bonds stopped earning interest.
Taxation: The interest earned on L bonds was subject to federal income tax, but it was exempt from state and local taxes. In some cases, if the bonds were used for qualified educational expenses, the interest might have been tax-exempt.
Redemption: L bonds could be redeemed after 6 months from the date of purchase. However, if you redeemed the bond before it reached maturity, you would receive the face value or the redemption value, whichever was higher.
Replacement: If an L bond was lost, stolen, or destroyed, it could be replaced if you provided appropriate documentation.
Availability: L bonds were available for purchase through financial institutions or directly from the U.S. Treasury.
It's important to note that L bonds are no longer issued, and the last series, the L-1982 series, stopped earning interest in 2012. If you own L bonds, it's a good idea to check their current value and consider whether it makes sense to redeem them or continue holding them, as they no longer earn interest.
Overall, L bonds were a type of U.S. savings bond designed to encourage savings by offering a low-risk investment with guaranteed returns over time. While they may no longer be available for purchase, they were an important part of U.S. savings history.
L Bond: Meaning, Overview, Characteristics.
Meaning
An L bond is a type of unrated life insurance bond that finances the purchase and premium payments of life insurance contracts bought in the secondary market. L bonds were issued by GWG Holdings from 2012 until 2021.
Overview
L bonds were marketed as a high-yield investment opportunity. The issuer, GWG Holdings, purchased life insurance policies on the secondary market, typically from policyholders who needed to sell their policies for cash. GWG Holdings then used the proceeds from L bond sales to pay the premiums on the life insurance policies.
Characteristics
L bonds had a number of characteristics that distinguished them from other types of bonds:
- High yield: L bonds offered high yields to compensate investors for the risk that the insurance premiums or benefits may not be paid. L bond yields typically ranged from 8% to 12%.
- Unrated: L bonds were not rated by any credit rating agency. This meant that there was no independent assessment of the issuer's creditworthiness or the risk of default.
- Illiquid: L bonds were not traded on a public exchange. This made it difficult for investors to sell their bonds if they needed cash.
- Complex: L bonds were complex financial instruments with a number of risks that investors needed to understand before investing.
Risks
L bonds were a risky investment. Some of the risks associated with L bonds included:
- Default risk: There was a risk that GWG Holdings could default on its obligations to bondholders. This could mean that bondholders would not receive their interest payments or principal repayment.
- Insurance risk: There was a risk that the policyholders whose insurance policies were owned by GWG Holdings could default on their premium payments. This could mean that GWG Holdings would not have enough money to pay the premiums on the policies, and the policies could be canceled.
- Liquidity risk: L bonds were not traded on a public exchange, making it difficult for investors to sell their bonds if they needed cash.
- Complexity risk: L bonds were complex financial instruments with a number of risks that investors needed to understand before investing.
Conclusion
L bonds were a risky investment that was not suitable for all investors. Investors needed to carefully consider the risks involved before investing in L bonds.
Current status
L bonds are no longer being issued. In 2021, the Securities and Exchange Commission (SEC) charged GWG Holdings with fraud for misleading investors about the risks of L bonds. GWG Holdings agreed to settle the charges and pay $26 million in restitution to investors.
Note
The information provided above is for educational purposes only and should not be construed as investment advice.