A Look At US Savings Bonds: EE vs. I Series Savings Bonds

The other day I was combing though our documents in our home safe and came across this pretty little purple envelope that read: “A Gift For You… A Share in America”. Can you guess what it was? It was a $50 paper EE US Savings Bond, back from 1982! I had almost forgot that I had it. I remember a few years back, I had contemplated cashing it in to help pay for college expenses. Looking back, I’m glad I didn’t!

I did a quick search online and found the Treasury’s website to find what the value of the EE bond was. Right now, the total value was $127.88. My first thought was that this wasn’t that much of a return for over 27 years, but then I realized that even though the face value of the EE bond was $50, it was actually purchased for $25. Now the $102.88 interest isn’t looking that bad. In fact, the calculator revealed that my bond was currently getting 4.00% interest. Nice!

I wasn’t really too familiar with paper savings bonds so I decided to check it out. Right away, I learned something new.  I learend there are three different types of bonds: EE, I and HH series US Savings Bonds. HH bonds, however, are longer issued as of September 1, 2004. The question still remains, which bond series is better: EE or I?

Here are some of the key facts and differences between the EE and I series bonds:

Purchasing the bonds:

• EE paper series bonds are purchased at half face value, so you would pay $25 for a bond with a face value of $50.
• I paper series bonds are purchased at full face value, so you would pay $50 for a bond with a face value of $50.

Potential value of bonds:

• EE series bonds are guaranteed to at least reach face value in 20 years (using the rule of 72, that is an average of a 3.5% return). When my bond was issued in 1982, it was guaranteed to reach face value in 8 years.
• I series bonds have no guaranteed return other than the fact they are fully secured and will not lose value.

How is interest earned:

• EE series bonds issued after May 2005 earn a fixed rate of return. Variable interest rates for bonds purchased from May 1997 through April 2005 are based on 90% of the 6 month averages of the 5 year Treasury Securities yields.
• I series bonds have a fixed rate of return and a variable semiannual inflation rate (based on CPI-U form March and September) are combined in a composite savings rate ((Fixed rate + 2 x Semiannual inflation rate) + (Fixed rate x semiannual inflation rate)).

There were also many similarities between the EE and I series bonds:

• Both are limited to purchases of $5,000 per year per Social Security Number
• Both are exempt from state and local income taxes
• Both can be redeemed after 12 months (however, there is a 3-month interest penalty if redeemed during the first 5 years)
• Both series of bonds fully mature after 30 years

So which series is better to purchase? Well, the simple answer is, depends on when they are purchased! Let’s take a look at two simple examples.

Example 1:

January 1, 2009 – a $50 savings bond was purchased:

An EE series savings bond had a fixed return rate of 1.3%

An I series savings bond had a fixed interest rate of 0.70% rate and inflation rate of 2.46% which works out to a 5.64% composite rate (remember, inflation rate will be variable and the fixed interest rate is locked in for the life of the bond).

Example 2:

January 1, 2000 – a $50 savings bond was purchased:

An EE series savings bond had a fixed return rate of 5.19%

An I series savings bond had a fixed interest rate of 3.40% rate and inflation rate of 1.76% which works out to a 6.97% composite rate. However, several times since 2000, the inflation rate dropped to a value where the composite rate was less than the EE series fixed rate of 5.19%

In summation, it seems like my EE series bond issued in 1982 was probably one of the better times to be locked in, even though the rates were not fixed at that time. I had an average return of just over 6.15% per year. Overall, it seems that the EE series bond is a more safe bet in the long run, but now probably wouldn’t be a great time to lock in to such a low rate. I believe the I series seems to be the way to go right now, even though you have to pay face value on the bond.  Remember, savings bonds make great gifts!

Are you holding on to any paper series EE or I series savings bonds?

Stupidly Yours,

Matt

Information compiled from TreasuryDirect