When it comes to savings bonds, most consumers are in the dark. For example, many believe that all savings bonds hold an apparent value of twice the invested value, meaning that if a person spends $25, then the bond says $50. Another misconception is that bonds always accrue interest.
Currently, interest rates are historically low for mortgages and other types of loans. Rates are also low for savings and money market accounts. These rates apply to bonds as well.
Series EE Bonds
EE bonds were introduced in 1980 to replace the E bond. When a person purchases this type of bond, it will have a face value of twice what was paid for it.
When the EE bond was introduced in 1980, it had an interest rate of 4.3% that later rose to more than 7%, allowing maturity to come in less than 10 years. During the 1990’s, as a result of interest rates falling, rates decreased to 4% and below. EE bonds that were purchased after June, 2003 will mature in 20 years. The current interest rate is 0.7%, according to the bond rate calculators on TreasuryDirect.com and SavingsBonds.com.
Series HH Bonds
Like the EE bonds, HH bonds were introduced in 1980 to replace H bonds. Unlike EE bonds, these bonds have a minimum value of $500 and the interest is paid to the owner every six months to his or her account as taxable income. These bonds mature after 10 years, but owners can elect to receive interest income for 20. Current HH bond rates are 1.5%
Series I Bonds
I bonds were introduced in 1998 with a rate of 3.4%. When purchasing an I bond with $50, the face of the bond will have $50 on it and interest will accrue for 30 years. The current interest rate is 0%, meaning that $50 purchased today will be $50 tomorrow, minus the devaluation of the dollar by various actions such as the printing of money by the Federal Reserve.
I bonds can be cashed in after five years with no penalty. If cashed in sooner, the penalty incurred is the most recent 3 months interest. It has not been all bad for I bonds, or all bonds in recent years. According to the calculators noted above, EE and I bonds purchased in 2006 are gaining ground at rates of more than 3% and 6% respectively.
Savings bonds are a very safe investment for any investment portfolio with a guarantee that no losses will be incurred with the exception of inflation. For investors with no tolerance for risk, savings bonds are the way to go as there is no risk to the amount invested, just the current guarantee that the dollars put into them today are going to be less competitive tomorrow.
Gains are likely to come again with favorable rates as the economy changes. As they do, it is important for investors to know what it is they are investing in.