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US Savings Bonds Series EE Question
Old 08-19-2010, 01:44 AM   #1
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US Savings Bonds Series EE Question

Individual - EE/E Bonds Rates & Terms

I have a small amount of these bonds bought in 1986. They are earning good rates.The bonds issued in those years had rates that cold float up, but not down, until they reached original maturity which I think was defined as the time at which they achieved face value, which amounted to a doubling of the original investment. I am not sure how the rate that I am earning now (4%) was determined, but I suspect that it was the rate on new EE bonds at the time when my bonds reached original maturity.

This sweet deal exists no longer. If I were to buy EE bonds today, they would earn a fixed rate of 1.4% pa, which would not vary no matter what happened to rates in the meantime. In this sense it is more like a CD with certain restrictions on redemption. They are not redeemable for one year from issue, and after that there will be a one quarter's interest subtracted from a redeemed bond.

There appears to be an interesting kicker though:

At a minimum, the U.S. Treasury guarantees that an EE Bond's value will double after 20 years, its original maturity, and it will continue to earn the fixed rate unless a new rate or rate structure is announced. If a bond does not double in value as the result of applying the fixed rate for 20 years, the U.S. Treasury will make a one-time adjustment at original maturity to make up the difference. Series EE bonds earn interest for 30 years.

Since to double in 20 years equates by the rule of 72 to 3.6% pa, it seems that if we find ourselves in a continuing low interest rate environment much like Japan, we could keep these bonds for 20 years and they would return at minimum 3.6% pa over the 20 years. It is not clear to me what might happen after that, but my guess, and it is only that, is that they would revert to the 1.40%, unless treasury offered some other higher rate.

This doesn't seem like a real bad deal on US treasury bond with deferred tax on the interest and a perpetual put less one quarters interest after one year. I think each individual is limited to buying only $10,000 worth per year.

If we might be looking to construct a fixed annuity that would pay $20,000 per year starting 20 years hence, and which is completely reversible, there may be worse ways to do it. I have never seen this mentioned and maybe no one thinks that 3.6% pa on a 20 year bond makes any sense, but it's more than the treasury is currently paying on its 20 year marketable bond. And that one has no put feature.

I would welcome any comments or different interpretations from anyone who reads the linked article from the Treasury Direct website, or has knowledge about this from other sources.

Ha
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Old 08-19-2010, 07:30 AM   #2
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Ha,

Suspect the "double in value" refers to achieving face value. You buy series EE bonds for half their face value.

Amethyst
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Old 08-19-2010, 08:37 AM   #3
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I've got about $10,000 worth in EE bonds that I bought through payroll deduction back when I was at w*rk. They will start maturing in few years, then after that another one is due each month after. I'll will just cash them as they are due. I've almost forgot all about them which is a nice surprise
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Old 08-19-2010, 08:40 AM   #4
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I think you covered it pretty well. I had a similar idea and bought a ton of EE bonds at the time. It's worked out pretty well except my idea was to eventually convert to HH bonds that paid 4% forever and you didn't get taxed on the interest you accrued in the EE's. Bad timing for me, they discontinued the HH series. In more recent years I have switched to buying I bonds.
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Old 08-19-2010, 09:29 AM   #5
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Quote:
Originally Posted by Amethyst View Post
Ha,

Suspect the "double in value" refers to achieving face value. You buy series EE bonds for half their face value.

Amethyst
Yes, what they mean is a double from what you paid. For paper bonds, you pay 1/2 face; for electronic bonds you pay face value and interest is added on top.

Ha
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Old 08-19-2010, 01:17 PM   #6
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I have EE bonds going back to 1990. I also have I and HH bonds. They're not very sexy, but I think they're a very nice part of my portfolio.
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Old 08-19-2010, 01:40 PM   #7
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If I buy $10K worth of EE bonds today, I will be earning 1.4% on that money for the next 30 years. In 20 years, the EE bonds will be worth about $13.2K and the treasury will make a one time payment of $20K-$13.2K=$6.8K. Do I understand this right?
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Old 08-19-2010, 01:44 PM   #8
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Quote:
Originally Posted by FIREdreamer View Post
If I buy $10K worth of EE bonds today, I will be earning 1.4% on that money for the next 30 years. In 20 years, the EE bonds will be worth about $13.2K and the treasury will make a one time payment of $20K-$13.2K=$6.8K. Do I understand this right?
That is my understanding, but I got that understanding the same way you did- reading the treasury statement. But this is what the thread if for- to be sure that this is correct.

However, also note that anytime after one year buyer can put the bonds back to treasury for a penalty of one quarter's interest. And after 5 years, no penalty.

Ha
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Old 08-19-2010, 03:38 PM   #9
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Quote:
Originally Posted by haha View Post
That is my understanding, but I got that understanding the same way you did- reading the treasury statement. But this is what the thread if for- to be sure that this is correct.

However, also note that anytime after one year buyer can put the bonds back to treasury for a penalty of one quarter's interest. And after 5 years, no penalty.

Ha
I think you may have found a creative loop hole. Most likely this is an unintended consequence of the current interest rate environment that the Treasury hasn't identified yet. When they do they will close this off.

I assume any bought before a change would be grandfathered.

Edit: Real issue here is that you can buy all of $10,000 p.a. (5 paper and 5 electronic).
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Old 08-19-2010, 05:07 PM   #10
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That's an interesting loop-hole. I wonder if it will hold up if someone tries to pursue that in a few years or if the info gets rewritten and isn't honored.

I hold both EE and I bonds and track them with the app that you download from the treasury site. It is interesting to see the value and various rates each bond is earning and will be useful when I cash some in sometime in the future.
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Old 08-19-2010, 05:28 PM   #11
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Well, you made me look it up. I have many EE bonds. The oldest is from Oct 1980, a $50 bond, for which I paid $25. Current value: $164.12, Interest rate is 4%, and I will redeem it this October. I got these bonds thru payroll deductions and I have to check each year which are maturing. Then of course, I get to include the interest when filing taxes.
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Old 08-19-2010, 06:33 PM   #12
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Ha -- you might want to post on Bogleheads to have Mel Lindauer confirm it.
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Old 08-19-2010, 09:06 PM   #13
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Ha is correct, see CFR 351.35(f) pertaining to Series EE
bonds with issue dates of May 1,
2005, or thereafter:


(f) Redemption value of Series EE bonds
at original maturity—(1) Definitive bond.
At original maturity, the redemption
value of a definitive bond shall not be
less than the face amount/denomination
of the bond.
(2) Book-entry bond. At original maturity,
the redemption value of a bookentry
bond shall not be less than double
the purchase price of the bond.
[70 FR 17289, Apr. 9, 2005]

http://www.treasurydirect.gov/forms/savdc1-80.pdf

But see my cya.
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Old 08-19-2010, 11:34 PM   #14
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I'm getting a sense here that others will see the same irony that I see in Savings Bonds.

I think they are one of the most complex investments I've ever owned (well, the kids own them). Not rocket science complex, but more complex rules than stocks bonds, ETFs, index funds. Yet, these are the things that the Grandma and Grandpa buy for the grandkids. I spent considerable time entering these into the treasury database, so I could find the past/current interest rates, due dates, try to find out what future rates might be, etc.

They just don't seem like G-ma and G-pa investment tools. Following the old 'don't invest in what you don't understand', I doubt too many of the G-ma and G-pas understand these. I'm fuzzy on them.

-ERD50
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Old 08-20-2010, 12:01 AM   #15
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We bought EE bonds for education between 1992-96 but we've been cashing them in for college room/board as fast as the interest payments are made. They'll be all gone early next year.

Our kid has a few hundred bucks in EE bonds, starting from her birth date in 1992. It'll be interesting to see how long she hangs on to them.
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Old 08-20-2010, 12:34 AM   #16
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At a minimum, the U.S. Treasury guarantees that an EE Bond's value will double after 20 years, its original maturity, and it will continue to earn the fixed rate unless a new rate or rate structure is announced. If a bond does not double in value as the result of applying the fixed rate for 20 years, the U.S. Treasury will make a one-time adjustment at original maturity to make up the difference. Series EE bonds earn interest for 30 years.

WOW! Seems this is CRAZY but TRUE!!! Confirmed it on Treasury Direct & by googling & reading multiple sites about Series EE.

Do I have this right? If I put $100 into a series EE bond today it will earn a fixed rate of 1.4% compounded semi-annually for 20 years (obviously far from doubling). So if I redeem it after 19 years & 11 months then I will receive approximately $132. But if I hold it for ONE more month until full maturity then I'll receive $200. That's some reward for waiting a month or a heavy penalty for early redemption! However you want to look at it.
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Old 08-20-2010, 09:08 AM   #17
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I thought OP said this deal no longer exists.
edit: upon reread, not sure anymore. Does this doubling thing apply to any vintage of EE bonds or to only a certain date range of purchases....sorry if that's already been mentioned here.
edit edit: sorry, Martha says > May 2005
(agree w/ ERD50 re complexity esp after having attempted to read Martha's link)

Also what a definitive bond (martha's post)? Paper?
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Old 08-20-2010, 11:10 AM   #18
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Definitive bond is a paper bond.
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