Although the U.S. Treasury has mostly phased out the issuance of paper savings bonds, many investors are familiar with paper bonds that are purchased for one-half of the face value. One common point of confusion is when that $50 or $100 savings bond will actually be worth $50 or $100. Redeeming a bond too early can cost you a significant amount of potential interest earnings.
Savings Bond Growth
Series EE savings bonds issued by the U.S. Treasury earn a fixed rate of interest with monthly accrual and semi-annual compounding. The cost of a paper savings bond is one-half of the face amount. For example, a $500 bond would cost $250. The bond would then earn interest to grow towards the face or maturity value. If a bond is cashed before reaching the maturity value, the bond owner will receive the initial cost plus the accrued interest. A bond can be cashed in at any time after the first year of ownership.
Maturity Value Guarantee
The Treasury guarantees a savings bond will reach the maturity value -- double the original investment amount -- within a certain number of years. Bonds issued since June 2003 are guaranteed to mature within 20 years after the issue month. Bonds issued from May 1995 through May 2003 have a 17-year guaranteed maturity, and bonds issued from March 1993 through April 1995 take no longer than 18 years to mature. A savings bond might mature faster than the guarantee, depending on the rate of interest it is earning.
One Time Interest Addition
If a savings bond reaches the maturity date and has not earned enough interest to double in value, the Treasury Department will make a one-time interest credit to the bond's value to bring it up to the guaranteed maturity value. This means that a bond may be worth significantly less than the face value just one month before it matures. An interest rate of about 3.5 percent is required to double an investment in 20 years. If you own a bond earning less than this rate, it will receive the interest rate credit at the 20-year point.
Savings Bonds Consideration
Starting in 2012, the Treasury stopped selling paper savings bonds through financial institutions. Electronic Series EE bond do not have a face value that is double the purchase amount, although they do come with the same maturity value guarantees. Savings bonds continue to earn interest after reaching the guaranteed maturity value. A bond will continue to earn interest for up to 30 years after issue. The Treasury.Direct.gov website provides an online savings bond value calculator and bond value tracking software which you can download to your computer.
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