What Is a Series EE Bond?

Among the numerous bonds offered by the U.S. Treasury are inflation-protected savings bonds. These bonds are low-risk, long-term investment tools that can be purchased in variable denominations, ranging from $50 to $10,000, and are therefore for savers great and small. They offer certain advantages relative to other forms of government bonds or commercial savings tools such as CDs.

Identification

The EE type U.S. Treasury savings bond is the successor to the E bond, which is no longer offered. Savings bonds differ from the standard types of Treasury bonds in that they are non-market securities. Unlike T-bills, for example, they cannot be bought and sold in the bond market. They are also distinct from other forms of savings bonds (such as the I-type bond) due to their specific terms.

Benefits

EE bonds are inflation-protected savings tools. As of 2005, they are purchased at a fixed rate of interest, with the rate of inflation added. Therefore, the actual interest rate is the prevailing interest rate at the time of purchase, plus the rate of inflation, which is periodically adjusted. EE bonds purchased between 1997 and 2005 were based on a variable interest rate formula, with both the interest rate and the inflation rate being adjusted periodically. These bonds are sold at half their face value, so a $50 bond is sold at $25. However, it is not worth its face value until it matures. This is an encouragement to hold the bond for its entire tenure, as the real value doubles with maturity.

Time Frame

EE bonds mature after 20 years and earn interest for 30 years. They can be redeemed at any time after 12 months of purchase. If redeemed before 5 years, they suffer a penalty equal to 3 months of interest.

Considerations

EE bonds can be purchased either in paper form or online via a TreasuryDirect account. Paradoxically, there is a limit of $5,000 in EE bond purchases per year, although a $10,000 bond denomination does exist. They are useful, long-term savings tools due to the doubling of their purchase value after 20 years.

Expert Insight

Given that the interest rate of these bonds are fixed, a good strategy for their use is to put a lot of money in them when the federal rate is high, and then to let them accumulate value for more than their 20-year maturity date. Purchasing a bond of this type when the interest rate is low is not wise, since there are short-term savings tools available with a higher rate of return. Also, any money you put in an EE bond should not be money you will ever need in the short or middle term. Once again, if you might need the money in less than 20 years, it is better placed elsewhere. These considerations make the good tools for saving for retirement or college funds.