How do series ee savings bonds work

how do series ee savings bonds work

US Series EE Savings Bonds

Here, we begin by describing what exactly Series EE savings bonds are and who can own them. We then move on to more details on how to go about procuring them and the interest rate they carry.

Series EE Savings Bonds are US Government-backed savings bonds. This means that they are one of the most secure investments in that your principal enjoys the highest level of protection.

Due to this very desirable quality of principal-protection, these savings bonds are popular among people looking to mainly preserve their capital and earn a little interest on it in the process.

The US Government benefits from issuing these bonds since it can use the proceeds to fund its spending needs.

Who Can Own Them?

Individuals, corporations, associations, public or private organizations can own Series EE/E Bonds. Some key ownership facts.

  • You need a US Social Security Number.
  • You need to be a US resident, US citizen living overseas or a Civilian employee of the US government regardless of residence.
  • You can be a minor.

    How Do You Buy Them?

    Today, EE Bonds are sold both electronically and in paper format. But not for long. Starting January 1, 2012, electronic EE Bonds will be the only option available.

    Electronic EE bonds are sold at face value with a minimum purchase of $25. This means that if you buy $100 worth, this $100 can be redeemed along with interest after the necessary vesting period — currently 12 months.

    Paper bonds, on the other hand, are sold at half their face value.So, the same $100 you had to invest will now get you a paper bond with a face value of $200. This $200 is available to you only after the bonds matures.

    Paper EE Bonds can be purchased in denominations of $50, $75, $100, $200, $500, $1,000, $5,000, and $10,000. Note that this is the face value. you're actually paying half of the face value when you buy.

    Purchase of EE bonds, both electronic and paper, is restricted to a maximum of $5,000 per year.

    That brings us to an important discussion on terminology. redemption and maturity.

    When you redeem a bond, you're cashing out. For an electronic bond, you get back your principal at face value. How much interest you get depends on how long you hold the bond.

    EE bonds can be

    redeemed anytime after 12 months from purchase. If redeemed within the first five years, you forfeit interest from the three months prior to redemption; no penalty if redeemed after five years.

    Maturity

    As of this writing (late 2011), the US Government guarantees that series EE savings bonds will at the minimum double in value in 20 years after their purchase date. If not redeemed after this period, they will continue earning interest till up to 30 years from their purchase date.

    Bonds purchased after June 2003, therefore, have a 20 year maturity. that is, they need to be held at least 20 yrs. to avail of this doubling of value. This 20 year period is called original maturity. Final maturity is 30 years. the bonds don't earn any interest after 30 years.

    Series EE Savings Bonds Interest Rates

    EE Bonds issued May 2005 and later earn a fixed rate of interest. The US Treasury computes the interest rate taking the yield on the 10-year Treasury note and adjusting it for things like early redemption and the option of deferring taxes.

    Twice a year — May 1 and November 1 — rates for new issues of EE bonds are adjusted. Interest is added monthly and compounded semi-annually.

    So what about EE bonds purchased prior to May 2005?

    Click here to go the US Treasury Direct website for a detailed listing of interest rates.

    Double Value Guarantee

    Here's an interesting thing about Series EE Savings Bonds.

    The US Treasury guarantees that an EE Bond's value will double after 20 years. That's a compounded return of roughly 3.5%.

    Now your EE bond always has a fixed rate of interest. what if that rate is less than 3.5%? In fact, from May 2007 till late 2011 (as of this writing), EE bond interest rates have stayed below 3.5%.

    In such cases, clearly the bond will not double it's value in 20 years. To remedy this the U.S. Treasury will make a one-time adjustment at original maturity to make up the difference.

    To wrap up, we looked at several aspects of series EE savings bonds. We hope you now have a clearer understanding of this particular class of bonds and are in a better position to evaluate if they are right for you.

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    Source: www.independent-stock-investing.com

    Category: Personal Finance

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