U.S. Series EE savings bonds are among the safest investments in existence. If held to maturity, they also provide a very competitive return. Savings bonds have a complex three-stage maturity structure covering a 30-year span. This requires that you pay close attention to how much time has elapsed since you bought your double E bonds, if you want to get the maximum possible return.
How Bonds Work
U.S. savings bonds are a zero-coupon accrual type of security. That means interest is added to your principal twice a year rather than being paid to you. Taxes on the interest are deferred until it is paid to you. The interest rate on savings bonds is adjusted every six months, on May 1 and Nov. 1, and it applies to all bonds sold for the next six months. The bond rate is based on market rates for 10-year Treasury notes.
First Maturity Stage
When you buy a bond, the interest rate in effect on the day you purchase the bond is the rate you will receive throughout the 19-year first stage of the maturity process. As of Nov. 1, 2012, the savings bond interest rate was reduced to 0.2 percent, compounded semiannually. This rate applied to all bonds bought between November 2012 and May 2013. Bonds bought before November 2012 continue earning the higher rates that were in effect on their purchase dates.
The U.S. Treasury guarantees that a savings bond will be worth twice what you paid for it on the 20th anniversary of the day you purchased the bond. An interest rate of 0.2 percent compounded semiannually over 20 years would add only about 5 percent to a bond’s original purchase price. In the second stage of the bond maturity process, called “original maturity,” the Treasury makes a one-time adjustment to interest on a bond’s 20th anniversary date to meet its guarantee of doubled value. This translates to an effective interest rate of 3.5 percent over the 20-year span. But if you cash in a bond before the 20th anniversary, you will get only the 0.2 percent rate
In the third stage of the savings bond maturity process, the bond will continue to earn interest for 10 years after original maturity. The rate during this final maturity stage reverts to the rate in effect at the time of purchase, unless the Treasury announces a new rate or rate structure for bonds in their final maturity period. After 30 years, savings bonds are fully matured and stop paying interest.
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