The two types of U.S. savings bonds, Series EE/E and Series I, offer tax-advantaged savings to individuals, particularly when the owner uses them to pay for part or all of his education. For this reason, many people find this safe investment vehicle to be an attractive purchase. Although the purchase price for each type of bond is quite different, they both earn similar interest rates and produce a minimal return at maturity.
The face value of a bond is the amount that the issuer will return to the investor on the maturity date of the debt instrument. The maturity date is the day on which the borrower pays the final lump sum to the owner of the bond. Savings bonds may be bought in denominations ranging from $50 to $5,000 for Series I bonds and $50 to $10,000 for Series EE/E bonds. The face value is the denomination of the bond and is a key component in calculating the present value of Series EE/E bonds and the rate of return for both types of bonds.
The interest rate is another key factor in calculating the value and return of a savings bond. These instruments accrue interest, which the investor earns on a monthly basis. This means that the interest is not paid to the owner periodically, but is instead added on to the total. The Treasury Department announces interest rates for savings bonds in May and November of each year. Generally, savings bonds do not earn high interest rates, as they are relatively safe investments that have the full backing of the U.S. government. Therefore, there is little risk involved.
Series EE/E versus Series I Bonds
Series EE/E bonds and Series I bonds are very similar and both are available in paper and electronic formats. The main difference in each type of bond is that Series EE/E paper bonds sell at half their face value. The electronic version, and both versions of the Series I bonds, sell at full face value. Each earns similar interest rates, are exempt from state and local income tax and have no federal tax due until the bonds are redeemed. The owner may not redeem the bond during the first year following the purchase but can any time following that. Redemption date is also a component of the rate of return.
Calculating Present Value
With Series EE/E paper bonds, the rate of return is dependent on the present value of the bond. Rather than earning interest on top of the full face value, the owner purchases the bonds at half the face value and they accrue interest until reaching full face value at the maturity date in 20 years. Therefore, the value of the bond changes each month by using the factors of purchase price, interest rate and time. The Treasury Department provides calculators to the public, which allows them to enter the type of bond and serial number, returning the face value at that current point in time.
Yield to Maturity
Yield to maturity, also known as the rate of return that the owner earns over the life of the bond, is a calculation that is of particular interest to those investors wishing to compare returns of different investment purchases. Using the interest rate, time until maturity, face value and purchase price, an investor can determine the yield of the bond. In doing so, he can then compare this value to that of other investment vehicles, since the yield of those may be calculated in much the same manner. It is particularly important to keep in mind that the low yield of a savings bond is increased by the tax savings of the investor and is a component of the low risk of default by the U.S. government.
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