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Columns: Dr. Don
Don Taylor, Ph.D., CFA, CFP   Expert: Don Taylor, Ph.D., CFA, CFP
Ask Dr. Don
Series EE bond guaranteed to double
Ask Dr. Don

Hold bonds to maturity for big payoff
 

Dear Dr. Don,
What is the best time of the month to buy U.S. savings bonds?
-- Mary Methodical

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Dear Mary,
Buying savings bonds toward the end of the month gives you a slight edge when it comes to interest earnings. If you buy a U.S. Series EE savings bond at the end of the month, you'll be credited with a full month's interest at the beginning of the next month. That's because the savings bond starts earning interest on the first day of the month in the month that it's issued.

The bonds increase in value every month by the amount of the interest earnings, but savings bonds compound interest semiannually. This means you don't start earning interest on the interest payments until the next semiannual compounding date.

Series EE savings bonds issued on or after May 1, 2005, pay a fixed rate of interest over the life of the bond. The original maturity is 20 years, but the bonds don't stop earning interest until 30 years from issuance.

Series EE savings bonds are guaranteed to double in value over their original maturity. When the fixed rate is lower than the rate needed for the bond to double in value over 20 years, the U.S. Treasury makes a one-time adjustment at original maturity to make up the difference.

New fixed rates are announced May 1 and Nov. 1 each year. The Nov. 1, 2007, interest rate for a Series EE savings bond is 3 percent. For a savings bond to double in value over 20 years, it needs to earn about 3.5 percent. That's a pretty big adjustment at year 20 -- if you hold the bond that long.

Example of a bond adjustment
Fixed interest rate:
Initial purchase price
Guarantee value
Value after 20 years
One-time adjustment

The numbers in the above table are approximate, but they show that you leave a lot of interest on the table if you redeem the bond prior to its original maturity. That's a lot more important than picking up an extra 13 cents in interest income on a $50 investment in the month you purchased the bond.

Series EE savings bonds purchased electronically using TreasuryDirect are now sold at face value, meaning you pay $50 for a $50 savings bond and its value grows from that face value to its full value at its original maturity.

Bankrate.com's corrections policy -- Posted: Nov. 15, 2007
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