Saving bonds are sold by the US treasury in two forms: EE bonds and I bonds. Both EE and I bonds offer low risk investment options to investors along with Tax savings. EE bond program has been in practice for a much longer time than I bond and hence is much widely known.
EE saving bonds are referred to as non-marketable saving bonds as they cannot be traded in the secondary market. These bonds are backed by the US Government’s guarantee to double in value by the end of the first term of the bond. These bonds pay a rate of interest that is fixed until the maturity of the bond which is usually spans a period of about twenty years. Some varieties of the EE bond has an additional ten years of interest paying life that extends beyond the first term. The interest component gets compounded from the first month of investment itself.
An additional advantage that an investor in an EE bond gets is that the interest income that is generated through the EE bond is not taxable by the State and Local Governments. The coupon rates are apportioned twice a year usually during the months of May and November, they generally get assigned a rate that forms a percentage value of the Treasury rate considered for a long term. The coupon rates remain the same for a half yearly period, beyond which it undergoes a change. Some of the bonds that were issued prior to 2005 did not conform to a fixed coupon rate. Initially the medium of issuing the bond was paper but with the advent of technology, now the bonds that are sold are in the electronic form. Paper EE bonds at the time of issue were issued at a fifty percent discount to par. The minimum cut off for purchasing an electronic bond these days is 25 dollars. These are purchased at face value and the maximum investment a person can do in a particular year in this type of bond is ten thousand dollars.
Series EE bonds by their inherent nature do not cover for inflation, yet retain desirability as they carry the promise of doubling in value at maturity. Hence, people invest in these types of bonds when they want to plan for a future date fixed expense like a child’s education, marriage, retirement plan or as a gift for a special education.
If the EE bond is redeemed within the first five years of purchase, the first three months interest payment gets forfeited. Post the completion five years there is no penalty applied.
Quiet similar in nature to the series EE bonds, I bonds are non-marketable. But they do not come with the guarantee of doubling in value upon maturity. Return of investment for I bonds is calculated in a different manner. In bonds on the contrary are issued with a fixed coupon rate that is complimented with the inflation adjusted rate from time to time. These adjustments are usually done twice a year around May and November.
The interest rate of I bonds is thus made up of two components. The fixed part and the variable part: The variable component takes into account the inflation rate fluctuation and adjusts accordingly for the change in the rate. Thus, in effect the fixed components stays fixed for the tenure, while the variable component changes as per the changes in the in the inflation rate.
In the rare case where the economy faces a negative inflation or a deflation, the inflation component for that particular period becomes negative. However, under no circumstance does the combined interest component go below one percent.
I Bonds are also offered at face value and have the same early withdrawal penalties as EE Bonds.
Thus I bonds too like the EE bonds offer a very low risk investment option.