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Dr. Don Taylor, CFA, Bankrate.com advice columnistFiguring out savings bond interest rate

Dear Dr. Don,
Please help me if you can! I have a Series EE U.S. savings bond issued in February of 1994 that has an interest rate that keeps changing -- from 6 percent to 1 percent and now is at 2.6 percent (yikes!) What gives? None of my other bonds have variable interest rates. Why is this happening?
-- Sopie Savings

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Dear Sopie,
I've been replying to a lot of savings bonds questions lately, so I really wasn't looking to take on another question. Yet yours intrigued me.

Over the years, the Treasury Department has changed how interest rates are established for the Series EE savings bonds so the interest rate you currently earn on a bond depends on when you bought it. Here's what the Bureau of Public Debt's Web site has to say about the interest rate paid on the bond you own purchased in February of 1994:

Bonds with issue dates of March 1993 through April 1995 have a guaranteed minimum rate of 4 percent per year, compounded semiannually. These bonds have an original maturity period of 18 years. Once they've been held for five years, they become eligible for market-based rates.

The market-based rates comment deals with how the interest rate on your bond varies over time base on the average yield on the five-year U.S. Treasury note.

The site also lets you download earnings reports on your savings bonds. I downloaded the most recent report to see that your February '94 savings bond is currently earning 3.62 percent and has earned 4.34 percent since issuance. I'm not sure where you're getting your numbers but the 2.6 percent number doesn't match up with what I'm seeing on the earnings report and in using the Savings Bond Wizard.

I recommend downloading the Savings Bond Wizard to track your portfolio of savings bonds. If you've been deferring the federal income tax due on the interest earnings, I don't think there's any need for you to redeem the bond and invest elsewhere, even though the current earnings rate is less than the 4 percent minimum. Unless the redemption can qualify for the savings bonds for education program, you'll owe that tax when you redeem the bond. Keep it invested instead in a guaranteed 4-percent return.

To ask a question of Dr. Don, go to the "Ask the Experts" page, and select one of these topics: "financing a home", "saving & investing" or "money".

Bankrate.com's corrections policy -- Posted: March 20, 2006
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