 Comparing
savings bonds
|  Dear
Dr. Don,
I have read about a change with the Series EE bonds,
but no one can explain it. Could you please explain the differences
now between the EE and the Series I bonds? Thank you. -- Roland
Review
 Dear
Roland,
For Series EE savings bonds bought between May
1997 and April 2005, the interest rate is reset every six months
-- in May and November -- using an interest rate that is 90 percent
of the average annualized yield of the five-year Treasury note over
the preceding six months.
As of May 2005, the interest rate on Series EE savings
bonds is fixed, and won't adjust after purchase. The interest rate
at which the bond will be offered will change every six months --
in May and November -- but the bond you buy will keep the rate you
buy it at for 20 years. The interest rate on the Series EE savings
bond is based on the yield of the 10-year Treasury note, but the
Treasury has been a little coy on the actual pricing relationship.
The interest rate on Series EE savings bonds bought between May
1 and Oct. 31 is 3.5 percent.
The 3.5-percent interest rate is interesting because
the U.S. government guarantees that a Series EE savings bond will
be worth the face value of the bond after 20 years. You purchase
a bond for half its face value and interest accrues over time. The
double your money guarantee means that, at a minimum, the government
would have to pay 3.5 percent because that's what it takes to double
your money over 20 years. So the government wasn't taking on much
risk in pricing this new savings bond to yield 3.5 percent.
Again, the interest rate on a Series I savings bond
changes every six months in May and November. The interest rate
is based on two components: the announced-coupon interest rate,
which does not change over the life of the bond, and the change
in the Consumer Price Index over the past six months. Series I savings
bonds purchased between May 1, 2005 and October 2005 will earn an
interest rate of 4.8 percent, which is broken down into the 1.2-percent
fixed coupon and an inflation component of 3.6 percent. The interest
rate on the Series I savings bond will change every six months,
but the fixed coupon will remain at 1.2 percent over the life of
the bond. This 1.2-percent fixed coupon is 0.2 percent more than
the fixed coupon set for Series I bonds issued between November
2004 and April 2005.
Both the Series I and the Series EE have a minimum
holding period of one year, and a three-month interest penalty for
early redemption if the bonds are cashed within the first five years
of ownership.
It's a little perplexing that the Treasury has made
this change in the Series EE bonds, but it does offer some interesting
options as interest rates start to trend higher. If long-term interest
rates continue higher, subsequent Series EE interest rates will
also trend higher.
Investors can make a decision to lock in a rate
for 20 to 30 years, yet be able to change their minds any time after
a one-year holding period with only paying a three-month interest
penalty and no interest penalty if they hold the bond for five years.
I can't currently recommend investors purchase the Series EE savings
bonds, but they should mark their calendars every May 1 and Nov.
1 to check on the new rates, and look to Bankrate for a discussion
of the new rates such as the Bankrate feature, "Savings
bond buyers may be offered a lousy deal.," by Laura Bruce.
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