Types of savings bonds
There are two types of savings
bonds being issued today, both with slightly different features
Series EE bonds: These are issued for
a 30-year term. Both principal and interest are paid in a lump sum
when the bond is redeemed. Interest is exempt from state and local
taxes, but not federal taxes.
Series EE bonds cost half their face value
and are sold in denominations of $50, $75, $100, $200, $500, $1,000,
$5,000 and $10,000. While the bonds are guaranteed to be worth at
least their face value at the end of their terms, they generally
reach their face value earlier and continue to build value. Currently,
EE bonds hit face value in about 17 years, 13 years before their
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. The current interest rate is 3.5 percent.
The government extended the length of time a bond
must be held before it can be cashed. The minimum holding period
will go from six months to one year effective with bonds issued
as of February 1, 2003.
Series I bonds earn a combined rate,
designed to be an inflation hedge.
It has a fixed rate of return plus an inflation
premium. The fixed rate and the inflation premium are adjusted every
May and November by the Treasury Department. But the fixed rate
assigned when you buy the bond is good for as long as you hold the
bond. The inflation premium ensures that you do not lose the purchasing
power of your investment over time.
Here's how it works. Suppose you buy an I Bond in December. The
current fixed rate that was set in November will be your permanent
fixed rate. You'll also get, for six months, whatever inflation
premium was set in November. When June rolls around your inflation
premium will be changed to whatever rate was established in May,
but your fixed rate will remain fixed. For example,
bonds purchased between now and October 2005 carry a fixed rate
of 1.2 percent, plus an inflation adjustment of 3.58 percent. That
gives them an overall yield of 4.8 percent.
I bonds increase in value monthly, and interest is compounded semiannually.
The interest accrues and is paid at maturity.
Which give more bang
for the bond? It's all about inflation. If the inflation rate rises
faster than bond interest rates, you're probably better off with
I-bonds, say some financial planners.
I bonds are sold in the same denominations as EE bonds, but
are purchased at face value, not discount.
As with Series EE bonds, the government extended the minimum holding
period from six months to one year effective with bonds issued as
of Feb.1, 2003.
Series HH bonds are not currently available
for purchase. They were issued for a 20-year term only in exchange
for EE bonds or to reinvest in HH bonds. As of September 1, 2004,
this option is no longer available. For current HH bond holders,
the gains from their EE bonds aren't taxed until the new HH bonds
are cashed or expire in 20 years.
bonds also make their own taxable payments of new interest every
six months, deposited directly into the bondholder's bank account.
That new interest is exempt from state and local taxes, but is subject
to current federal taxes.
The advantage of these bonds was that they could
be used to extend the tax deferral of interest EE bonds and provide
income. For those currently holding HH bonds, they are especially
useful when the bond holder has moved into a lower tax bracket,
such as retirement.
The current fixed annual rate of interest on
HH bonds is 1.5 percent, and that rate is guaranteed for the first
10 years. HH bonds are sold in denominations from $500 to $10,000.
They may be redeemed after as little as six months. However, the
last issue month for HH bonds will be August 31, 2004. After this
date, you will not be able to reinvest you HH/H bonds or exchange
your EE/E bonds for HH bonds.
-- Updated: May 9, 2005