The US Treasury Bond Program was introduced in 1935 to encourage Americans to save money and invest in US government. The Treasury has adapted to the times, however, and with rare exceptions, capitalization bonds are no longer printed on paper. The government sells savings bonds with serial number and other securities on its website.
Savings bonds now come in two versions: Series EE bonds and Series I bonds. Series EE bonds have a fixed rate and are investments guaranteed to double in value in 20 years. The new Series I bonds have a fixed rate and a variable rate to keep up with inflation.
Main advantages
- The Series EE premium bond has a fixed rate of return.
- The US government commits that Series EE bonds will double their face value at 20-year maturity.
- The Series I premium bonds have no guarantee of value at maturity.
- Series I bonds have a fixed rate plus an inflation-adjustable interest rate.
US Series EE Savings Bonds
The best-known Series E premium bond is a direct descendant of the Series E premium bond. The original Series E was known as the War Bond and helped finance American participation in World War II.
Series EE bonds can be purchased at a face value of as little as $25. Face values are also available in one-cent increments on the basis of $25 . Therefore, you can buy a bond for $25.32 if Wish. The maximum amount a buyer can buy in one year is $10,000. The bonds are issued to a single owner and cannot be sold on the secondary market.
Double value guarantee and redemption
EE bonds come with a US government guarantee to at least double in value over the bond’s term, which is usually 20 years. Upon maturity, the bondholder can redeem the principal or elect to charge additional interest for an additional 10 years after maturity.
Holders cannot redeem the security before holding it for one year. After that anniversary, they can redeem at any time and will no longer earn additional interest. If redeemed within five years of purchase, there is a three-month interest penalty imposed. Also, the minimum ransom amount is $25.
EE series interest rate
The interest rate is fixed for 20 years at the time of issuance. The government can adjust the rate after the 20th year. Rates paid on Series EE bonds are fixed semi-annually, in May and November, and remain the same for all bonds issued during the following six-month period. For example, for the six months ending November 30, 2019 , the interest rate on Series EE bonds was 0.10%.
The purchaser of an EE Series electronic security prepays the full face value of the security. If compound interest does not double in 20 years, the US Treasury commits to make up the difference.
Interest income from EE bonds is exempt from state and local taxes, but not federal taxes. The owner may receive a tax break if the funds go to finance qualified higher education.
Series EE bonds issued before June 2003 were bought at half face value, with the promise that they would double to face value in 20 years. Interest for these older bonds is calculated on the payment amount, not the face value.
US Series I Savings Bonds
Series I savings bonds are relatively new, having been introduced in 1998. Unlike EE bonds, Series I bonds do not come with a 20-year doubling in value guarantee. Instead, Series I bonds are issued for a period of 30 years and have a rate of return that is fixed for the life of the bond plus an inflation-adjusted interest rate.
The adjustable rate is reviewed semiannually, in May and November, and is based on the Consumer Price Index for All Urban Consumers (CPI-U). This CPI number takes into account the products purchased by nearly 90% of the American population and is considered a better indicator of consumer spending. Series I bonds purchased during the six months ended November 30, 2019 are paying 2.22% interest.
Purchase of Series I bonds
Series I bonds can be purchased directly from the US Treasury. They can also be purchased through income tax return, using tax refund dollars. When using an income tax return to purchase Series I bonds, it is rare that the buyer will receive a paper certificate.
There are also several similarities with the EE series titles. Series I bonds cannot be sold, but can be redeemed early with a three-month interest penalty if it is less than five years from the date of issue.
Differences in Series I titles
A potential bonus is that Series I bonds, if used to pay higher education costs, may be exempt from federal taxes as well as state and local taxes – the bond must be redeemed and the proceeds used in the same calendar year to qualify.
The main difference between the two types of savings bonds is the adjustable rate. Series I bonds are not guaranteed to double in value in 20 years, but they do have a built-in inflation adjustment.
What’s the worst that could happen? The owner of a Series I bond can be hit by years of low inflation or even deflation and not be able to double in value over time.
