Saving Bonds - Your Guide To US, UK & Canadian Savings Bonds

ee saving bonds

saving bonds traderAs I have tried to stress throughout this site, savings bonds alone will never be a 'star performer' in your portfolio. Risk and reward always go hand in hand, and with lower risk comes lower reward. As we are looking at low risk and long term, the savings bonds we will consider here are those issued by the US Treasury Department - why? - because they represent the lowest form of risk in the bond market. In fact in some ways they are more secure than cash in the bank. With the recent spate of bank 'collapses' following the sub prime lending crisis, your money in the bank is only guaranteed to $100,000, so if a bank were to collapse, this would be the maximum you would be guaranteed to recover under the FDIC protection policy. In the US we had Bear Stearns, in the UK, Northern Rock, and in Japan in the bubble economy of the 1990's we had several which were eventually supported by the Bank of Japan - Japan is still recovering from a similar economic cycle 20 years later.

With saving bonds your money is 100% guaranteed as they are backed by the full faith and credit of the United States government. So as long as the US government is around, your money is safe. This is why I have concentrated on these safe bonds, as a starting point of your investments. By all means look at other types which are commercially traded, but please understand the risks before you start. US treasury ( and other government backed bonds) are the safest form of bond investment, and I would recommend you start with these, before moving to other bond markets. Now there are two principle series of US saving bonds currently, the ee saving bonds, and the i saving bonds. The last issue date for HH series bonds was August 31st 2004. So let's start by looking at the ee saving bonds.

saving bonds series ee

The ee saving bonds are the standard US savings bond and they replaced the earlier E bonds which are no longer issued by the U.S. Treasury. The ee saving bonds are available in two different formats, namely electronic and paper. Series ee saving bonds have many different rules depending on when they were issued, and in order to try to provide you with as much information as possible I have detailed these in the table below, up to the current series :

Issue Dates Terms
Bonds issued before November 1982 Interest earning for up to 30 years. Rates are guaranteed or at market-based rates, whichever produces the higher redemption value.
Bonds issued November 1982 to February 1993 Interest earning on a fixed graduated scale that starts at 4.16% at six months and increases during the first five years to reach a guaranteed minimum rate at five years. These bonds are eligible for market rates once held for five years. The guaranteed minimum rates are as follows and are compounded twice a year :
November 1982 to October 1986 - 7.5% per year for their 10 year original maturity period
November 1986 to February 1993 - 6% per year for their 12 year original maturity period
Bonds issued March 1993 - April 1995 Interest guaranteed at a minimum of 4% per year, compounded twice a year. These bonds become eligible for market rates once held for five years. Original maturity period is 18 years.
Bonds issued May 1995 - April 1997 Series EE savings bonds issued May 1, 1995 through April 30, 1997, earn interest based on market yields for Treasury securities. The Short-Term rate is applied to bonds for the first five years they are held. The Long-Term Rate is applied to bonds from five years through 17 years. Bonds will continue to earn interest from 17 years through 30 years at the rates then in effect.
Bonds issued May 1997 - April 2005 These bonds earn interest based on 5 year treasury security yields from day one, up to 30 years. Rates are calculated as 90% of the average yields for the preceding 6 months. Interest is compounded twice a year. The bond increases every month, instead of the more usual 6 months.
Bonds issued May 2005 to date Interest is fixed for the first 20 years of the bond. After the initial 20 years, an additional 10 year extension and rate update will be started, giving a total of 30 years life for the bond. Should the bond not reach face value after 20 years, the Treasury will make a one off adjustment to bring the value to par.

series ee savings bond

Now let's look at the general rules that apply when purchasing ee saving bonds as follows:

Information Detail
Denominations available $50, $75, $100, $200, $500, $1,000, $5,000, $10,000
Interest period 30 years
Early penalty Applies for encashment before 5 years. You will forfeit the last three months of interest. After 5 years no further penalties apply.
Annual Allowance Maximum of $5,000 EE series paper bonds per annum as well as $5,000 EE series electronic bonds per year. ( see below for an explanation )
Redemption/Exchange Not permitted within the first year of ownership
Federal Tax Interest is required to be reported, either annually as it accrues, or on redemption of the bond. Some tax can be offset under the Education Savings Bond Programme where these have bee used for higher education purposes - please consult a tax expert if in doubt.
Local/State Tax EE bonds are 100% exempt of state and local taxes

ee savings bonds

The ee savings bonds are available in two different versions, namely electronic and paper. Electronic bonds are sold at face value, which means you pay $25 for a $25 bond, and it is worth its full value when it is available to be redeemed. These bonds can be purchased for any dollar amount of $25 or more as there is no fixed denomination. It goes without saying but these are issued electronically!!

The EE series paper saving bonds are slightly different as they are sold at half the face value. So if your purchased a $50 paper bond, you would only pay $25. The bond then increase in value over time until it reaches maturity at which point the face value is reached.  These bonds may only be purchased in pre-determined denominations  as detailed above. You may purchase $5,000 electronic and $5,000 paper EE series bonds in any one financial year giving a maximum of $10,000. They are issued as certificates.

buying a savings bond

So, who can own EE series saving bonds - I have listed the main criteria below in the following table :

Resident of the United States
US citizen living abroad, although you must have a US address record
Civilian employee of the United States regardless of residence
Minors may own EE Series saving bonds ( unlike many other countries)

I  hope that's given you a feel for the EE series saving bonds - now let's take a look at the i saving bonds on the next page.

Saving Bonds - next page