How Much Do Saving Bonds Pay in Interest?
Savings bonds are savings certificates issued by the U.S. government. The bonds provide a safe way to invest small to large amounts of money. The minimum investment amount is $25. Savings bond interest is tax-deferred until a bond is cash in or redeemed. The bond interest is also exempt from state income taxes.
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Savings Bond Interest Earnings
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Series EE savings bonds earn a fixed rate of interest until redeemed or 30 years after issue. A savings bond accrues interest every month, and the interest compounds every six months. The compounding means at the end of each six-month period, the interest earned is then calculated on the new, higher value of the bond. Bonds redeemed in the first five years after issue are charged a penalty equal to the most recent three months interest earnings.
Saving Bond Interest Rate
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The U.S. Treasury sets the rate for series EE savings bonds on May 1 and November 1 each year. The declared rate is the interest rate for new bonds issued during the next six months. Outstanding savings bonds continue to earn the rate declared at the time of issue. In February 2011, new series EE savings bonds were earning interest at a rate of 0.60 percent. The rate for the six months prior to Nov. 1, 2010, was 1.40 percent.
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Guaranteed Future Value
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Paper savings bonds are issued at a cost of one-half the denomination amount. For example, a $500 savings bond is purchased for $250. The interest accrues from the purchase price. Savings bonds issued since June 2003 are guaranteed to reach the denomination amount or double in value no later than 20 years after the issue date. If a savings bond has not earned enough interest to double within 20 years, the Treasury will make a one-time interest credit to bring the bond up to the required value.
Effective Return
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For savings bonds held for at least 20 years, the guarantee to double increases the effective earned interest rate. The doubling of an investment in 20 years is the equivalent of earning a 3.5 percent interest rate. In the rate environment in effect in 2011, a plan to hold savings bonds for 20 years will result in a significantly better earned interest rate.
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