Series EE Bonds are a type of U.S. government savings bond designed to offer a secure and low-risk investment option. They provide an accessible way for individuals to invest with the safety of government backing and a predictable return. In this blog, we’ll explore how Series EE Bonds work, their key features, and who can benefit from investing in them.
What Is a Series EE Bond?
The Series EE Bond, commonly known as a "Patriot Bond," is a non-marketable, interest-bearing savings bond issued by the U.S. government. These bonds are designed to at least double in value over a standard initial term of 20 years. In some cases, the total interest-earning period for Series EE Bonds can extend beyond the original maturity date, lasting up to 30 years from the date of issuance. The coupon rates for Series EE Bonds are set at the time of issuance and are linked to a percentage of long-term Treasury rates.
How a Series EE Bond Works?
Alongside the Series I bond, the Series EE bond is one of the two types of savings bonds issued by the U.S. Treasury. Unlike other securities, Series EE bonds cannot be bought or sold on the open market, classifying them as non-marketable securities.
Bonds issued after May 2005 are assigned semi-annual fixed coupon rates, which are determined on May 1 and November 1, and these rates apply to all issuances for the following six months. Although the bonds increase in value monthly, interest payments are made semiannually.
Series EE bonds are regarded as ultra-safe, low-risk investments, with interest typically exempt from state and local taxes. However, they are subject to federal taxes, but only in the year the bond matures or is redeemed. EE Bonds can be purchased by U.S. citizens, official U.S. residents, minors, and all U.S. government employees, regardless of their citizenship status.
Series EE Bond Calculations
To understand how Series EE bonds work, it's essential to grasp how their value and interest are calculated. Here are the key points to consider:
- Purchase Price: Series EE bonds are sold at face value, meaning if you buy a $100 bond, you pay $100.
- Interest Rate: The interest rate for Series EE bonds is set at the time of issuance.
- Interest Accrual: Interest on Series EE bonds accrues monthly and compounds semiannually. This means that the interest you earn is added to the principal amount, and the next interest calculation is based on the new total.
- Doubling of Value: Series EE bonds are guaranteed to at least double in value if held for 20 years. If they do not reach this value through interest alone, the U.S. Treasury will make a one-time adjustment to ensure the bond's value is doubled.
- Maturity and Redemption: Series EE bonds reach maturity after 30 years. At maturity, you can redeem the bond for its full value, which includes the original purchase price plus any accumulated interest.
Example Calculation
To illustrate how these bonds work, let’s look at a hypothetical example:
- Bond Value: $100
- Fixed Interest Rate: 1.0% (for illustrative purposes)
- Time Held: 20 years
Step 1: Calculate the total interest accrued over 20 years.
- If the bond's interest rate is 1.0%, the annual interest is:
Annual Interest=100×0.01=1 - Over 20 years, the total interest would be:
Total Interest=1×20=20 - Therefore, the total value of the bond after 20 years would be:
Total Value=Purchase Price+Total Interest=100+20=120
Step 2: Determine if the bond doubles in value.
- Since Series EE bonds are guaranteed to double in value if held for 20 years, this bond should be worth $200 at maturity, irrespective of the interest accrued.
Who can Invest in a Series EE Bond?
The Series EE bond can be purchased by Individuals, Trusts, Estates, Corporations, Partnerships & Entities with a Social Security Number (SSN) or Employer Identification Number (EIN)
The registration process during the purchase identifies the bondholder and who can redeem it. This includes the owner’s name (individual or organization), SSN or EIN, and a secondary owner or payee.
Both adults and minors with a valid SSN can invest in Series EE bonds, provided they meet at least one of the following criteria, regardless of their current location:
- U.S. citizenship
- U.S. residency
- Civilian employee status in the U.S.
It's important to note that minors cannot open a TreasuryDirect account or conduct financial transactions independently. However, a parent or adult guardian can open an account linked to their own and manage investments on behalf of the minor.
Requirements for a Series EE Bond
The minimum investment requirement for Series EE bonds is $25, and each investor can purchase up to $10,000 in these bonds per calendar year. Bondholders must keep their investments for at least twelve months before they can redeem them. If bonds are redeemed within the first five years, investors will forfeit three months' worth of accrued interest. Since EE bonds can earn interest for up to 30 years, the longer they are held, the more valuable they become.
Paper bonds are issued at a 50% discount to their par value, while bonds purchased electronically through TreasuryDirect are acquired at face value. Regardless of the purchase method, these bonds are guaranteed to be worth twice their original value at maturity after 20 years, with interest payments structured similarly to paper EE bonds.
How to Buy Series EE Bond?
Investors can purchase electronic EE savings bonds through the TreasuryDirect portal, where they can buy, manage, and assess the value of these bonds alongside other securities issued by the U.S. government.
Bottom line
Series EE Bonds offer a reliable and straightforward way to invest, with the promise of doubling your initial investment if held for 20 years. They are an excellent choice for conservative investors looking for low-risk options and those interested in guaranteed returns. Investors can also invest in Compound real estate bonds that offer fixed 8.5% APY and are backed by US Treasuries and real estate.
