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If you are looking for a conservative investment for your portfolio, you may be considering U.S. Treasury EE or series I savings bonds. Understanding their similarities and differences, as well as their tax consequences, will help you decide whether to make savings bonds a part of your investment strategy.
Series EE bonds
The federal government began issuing paper EE bonds in 1980. Paper EE bonds are issued at a discount of 50% of their face value. The government offers them in various denominations (face value). Generally, you may spend up to 530,000 (that is, $60,000 face value) per calendar year on paper EE bonds. The federal government began issuing electronic EE bonds in May 2003. Electronic bonds are not issued at a discount, but rather are issued only at face value. Generally you may spend up to $30.000 per calendar year on electronic bonds.
Interest is applied semlarmiiaHy, calculated as 90% of the six-month average of five-year Treasury securities, resulting in an interest rate that varies over the life of the bonds. The Treasury Department announces new rates each May 1 and November 1. Once the Treasury announces a new rate, it applies to all bonds issued or held during the next six-month holding period.
EE bonds issued after May 31, 2003 are guaranteed to reach their maturity at face value within 20 years. If the computed interest rates were so low over this 20-year time span that they precluded the bonds from reaching maturity value, the Treasury Department would make a special onetime adjustment to increase the value of the bonds to maturity value. EE bonds earn interest for a maximum of 30 years (known as the final maturity date), after which time interest no longer accrues.
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