U.S. saving bonds are geared to small, conservative investors interested in safety, capital appreciation, and tax savings. Series EE bonds would not be attractive to investors looking for income or aggressive investors looking for capital appreciation.
Return of U.S. Savings Bonds
The return from U.S. Saving Bonds is not especially enticing, although the exemption from state and local taxes does help enhance the return. For the long-term, U.S. Saving bonds fall far behind stocks - about 4.8 percent per year for savings bond versus 10.7 for stocks.
Series EE bonds have a variable rate that changes every six months. The rate is based on 90 percent of the average of the prevailing market yields on five-year Treasury securities. So if five-year Treasury securities are paying 5 percent, a Series EE bond would pay 4.5 percent. A new rate is announced each May and November that reflects average market yields during the preceding six-month period. Because the interest rate for Series EE bonds is a market-based, variable rate, there is no way to predict when a bond will reach face value. However, Series EE bonds are guaranteed to reach maturity within 17 years.
Interest does not begin to accrue until the fourth month after the bond is issued. Then it accrues on the first day of each month. Interest is paid when the bonds are redeemed. If a Series EE bond is redeemed less than five years after the date of issue, the overall earning period from the date of issue will be reduced by three months.
Series HH bonds, on the other hand, pay interest at a fixed rate set on the day you buy the bond. Interest rates are reset on the 10th anniversary of the HH bonds' issue date. The interest rate is generally very low.
Unlike Series EE bonds, Series HH bonds are current-income securities, which means the HH bond itself doesn't increase in value. When an HH bond is issued, the investor pays the face amount for the bond and interest is paid every six months. The interest payments on HH bonds are made by direct deposit to the investor's checking or savings account.
Risks of U.S. Savings Bonds
There are almost no risks associate with owing U.S. Savings Bonds. They are almost as safe as cash itself because they are backed by the full faith and credit of the federal government.
