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  CDs and Investing Basics   Chapter 3: Investing in bonds
Bewildered by bonds? Troubled by Treasuries? We've got you covered -- from savings bonds and beyond!
 
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Series EE Patriot Bond

 

The Series EE Patriot Bond is called a war bond, but it's really just meant to show patriotism. After the Sept. 11 attacks, Congress passed at least three measures calling for the Treasury to issue war bonds.

The bond bears the inscription "Patriot Bond," but in all other respects it is a regular Series EE savings bond. The money raised by the bonds goes to the general fund. The bonds carry the same yield as any other Series EE bond.

Like the I Bond, the EE is re-priced semiannually, but it only has one rate; there is no inflation component. Since its inception, the EE was a variable rate bond with its rate pegged at 90 percent of the average five-year Treasury securities yield for the preceding six months. As of May 1, 2005, the Treasury made the EE a fixed-rate bond. A new rate is still issued every six months, but the rate you get at purchase is the one you keep for as long as you own the bond. The rate is pegged to the 10-year Treasury average for the preceding month.

Series EE-Patriot Bonds

At a glance
The fixed-rate element makes the EE a good buy when interest rates are high and a bad deal when rates are low.

The EE Bond is an accrual security. Interest is periodically added to the amount you originally paid. As the interest accrues, the value of your bond increases.

As with the I Bond, you may purchase the EE Bond at many financial institutions, through payroll savings plans or online at TreasuryDirect, the government's Web site.

Paper bonds come in seven denominations: $50; $75; $100; $200; $500; $1,000; and $5,000. If you buy the bond online, there is also a $25 denomination.

Paper versions of the EE Bond are sold at one-half face value. In other words, a $50 bond will cost you $25. Electronic bonds are sold at face value. There's no real difference or advantage to buying one over the other because you only earn interest on the amount you paid for the bond.

If you pay $100 for a paper bond with a $200 face value, and someone else pays $100 for an electronic bond worth $100, you'll both receive the same amount of interest. But, if you pay $100 for a paper bond with a $200 face value, and someone else pays $200 for an electronic bond with a $200 face value, you'll get half the interest of the person with the electronic bond.

Even though the EE didn't promise inflation protection, the bond had a history of averaging about 2 percent better than inflation on an annual basis. Of course, that was before it switched to a fixed rate. Now it definitely offers no inflation protection.

The interest earned is subject to federal income tax, but not state or local income tax.

-- Updated: Oct. 17, 2008
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