Savings Bonds

Consider this investment opportunity. You have the chance to purchase a zero-coupon bond that pays 85% of the average yield on 6-month T-bills for the first five years you hold it. After five years, the return jumps to 85% of the 5-year Treasury rate adjusted semi-annually. You can't get out of this bond for at least six months and when you do, the return is not credited in-between interest dates. So, if you redeem two days before that semi-annual date, you have missed out on six months of interest. These bonds, by the way, are held for an average of ten years, even though they pay short-term rates for long-term investment.

Sounds like it wouldn't be hard to pass up these bonds and consider other investments. But believe it or not, investors will scoop these bonds up faster than kids at a Pogs convention. They are U.S. Series EE Savings Bonds and their general rules have recently changed somewhat for new bonds issued. The new variable rate rules for EE bonds purchased are those just described.

To be fair, Series EE bonds do offer some unique advantages. First, unlike other zero coupon government debt, no taxes are due on the accrued interest until the bonds are redeemed. Second, under certain circumstances the interest on the bonds may be completely tax-free if the bonds are redeemed in a year in which you pay college tuition for yourself or a child. Third, they are direct obligations of the U.S. government so they offer rock solid security of principal. They are available in convenient denominations ranging from $50 to $10,000.

Series EE bonds may only be purchased directly from the government, through a participating bank or savings institution or through a payroll savings plan established by an employer. Also they may be purchased through TreasuryDirect a Web-based system that allows investors to establish accounts to purchase, hold, and conduct transactions in Treasury securities online. Savings bonds can only be registered in one of three ways: in single name, jointly with right of survivorship or in single name with a designated beneficiary to be paid upon the death of the owner. Once purchased, savings bonds cannot be sold or transferred to someone else. They also may not be used as collateral for a loan. Purchasers are limited to $30,000 in face value (or $15,000 in purchase price) worth of Series EE bonds per year.

As mentioned, Series EE bonds are essentially zero coupon bonds. They are purchased at half their face value. If held for five years the older outstanding bonds accrue interest at 85% of the average rate on 5-year Treasury notes, adjusted semi-annually every May and November or at a guaranteed minimum rate depending on their issue. No more guaranteed minimum for the new bonds. At 4%, Series EE bonds are guaranteed to reach face value in about 18 years. Of course, if 5-year Treasury rates are higher than 4% over the life of the bond, Series EE bonds could reach their full face value in less than 18 years. The bonds can be held, and interest will continue to accrue, for up to 30 years after issue.

More info on these bonds, such as the prevailing rate, can be obtained by calling 1-800-4US-BOND or via the internet @ www.publicdebt.treas.gov. You might want to check with your financial advisor whether savings bonds should be playing a part in your portfolio.

Savings bonds are easy to buy, safe and secure, a market-based investment, a liquid long-term investment, can be used for education savings, have tax advantages and are Good for America! All of these statements are true, to an extent, but do you know when savings bonds are really good for America and really 'bad" for you?

They start to become 'bad" for you as an investor when they stop paying interest, and you continue to hold them. You may think you would never make this mistake, but more Americans do than you would think. The value of savings bonds held by investors and earning zero interest is an estimated $5.9 billion. Next year, that number could grow to over $7 billion.

Savings bonds are not held in accounts and no one keeps track of them for you. Anyone who owns savings bonds should take the time to find out what their investments are earning. You may be thinking easier said then done. Well, your favorite uncle is here to help. The U.S. Government has developed a helpful web-site for savings bonds. By paying a visit to www.publicdebt.treas.gov/sav/sav.htm you can learn a great deal of information about savings bonds as well as what your investments are earning. From the web-site, you can download the Savings Bond Wizard. Investors simply type in the serial number and date of issue of their savings bonds and the program gives back the current value, the interest earned, the date of the next interest accrual, the yield to date and when the bond will stop paying interest. Badda-bing badda-boom, its that simple!

If you are unable to utilize the web-site, the chart below will aid you in determining if your savings bonds are still earning interest. Any bond that is more than 40 years old is not earning interest any more. And many that are 30 years old have also stopped bearing interest.

Don't lose valuable interest and let the government use your money interest free. Find out if your savings bonds are past maturity and act accordingly.