Comparing CDs and savings bonds
Dear Dr. Don,
Are CDs (certificates of deposit) a better
investment than Series EE or Series I savings bonds?
It depends. What's your investment horizon and how likely is it
that you'll need to redeem the investment prior to maturity? Your
investment horizon is an estimate of when you plan to need the money
and the probability of early redemption deals with the possibility
that you'll need the money sooner than you planned. Both savings
bonds and CDs have early redemption penalties, and you now have
to own a savings bond for at least one year before you can redeem
it. Your investment horizon and possible redemption needs are very
important when deciding how to invest.
The Bureau of Public Debt's Web site explains the
interest rates on Series EE and Series I savings bonds:
Series EE savings bonds are now a fixed-rate bond
with its new rate based on the 10-year Treasury average for the
preceding month with adjustments made for features such as tax
deferral. When you buy the EE bond, you'll earn the current fixed-rate
for the next 20 years.
It had previously earned 90 percent of the average
yields on five-year Treasury securities for the six months preceding
the announcement of new rates. While the Treasury Department will
still announce new rates each May 1 and November 1, the new interest
rate will apply to Series EE savings bonds purchased after those
Currently, Series EE bonds earn 3.5 percent.
I savings bonds have both a fixed interest rate component that
is established at the time you purchase the savings bond and a variable
interest component that changes every six months based on changes
in the Consumer Price Index (CPI). The current interest rate on
Series I bonds is 4.8 percent. The compound rate includes a fixed
rate of 1.2 percent and a semiannual inflation-adjusted rate of
3.58 percent. (The slight discrepancy is due to the way the composite
is calculated.) The rates are reset every May 1 and November 1.
If you're saving for your children's college education,
then investing in savings bonds can make more sense because of the
Bonds for Education program. There are income restrictions,
so review the rules before starting this program.
Both CDs and savings bonds, like U.S. Treasury securities,
have no risk to principal, although a Treasury security can sell
at a loss if sold before it matures. Assuming a five-year horizon,
the alternatives are shown below:
|Series EE Savings Bond
|Series I Savings Bond
|5-year Treasury Note
The yields on the Series I savings bonds will fluctuate
with the interest rate resets in November and May each year. If
you think inflation will heat up over time and/or interest rates
will head higher, then the savings bonds will capture some of that
The longer your investment horizon, the more attractive
the savings bonds become vs. CDs because of the variable interest
rates and early redemption options.