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Savings-Bonds-Alert: I versus EE: the difference in a nutshell

Thursday, February 24, 2005

I versus EE: the difference in a nutshell

I was wondering what the difference (in a nutshell) is between Series I and EE Savings Bonds. When I read about how the interest is accrued, I get lost along the way. :) Tom's response Have you ever noticed how prices tend to rise over time on the same stuff? When I was a dust-covered boy in Kansas, my doctor's office had a five-cent Coca-Cola machine. Even if you adjust for the fact that today's Coke machines give you cans twice as big as the 6-ounce bottles of the 1950s, today's price is much higher. That's called inflation. The government's Bureau of Labor Statistics collects the average prices people are paying every month and uses the data to produce the Consumer Price Index. Series I Bonds are designed to protect you from inflation. The interest rate paid by Series I bonds includes a component that's fixed for the life of the bond when you buy it, plus the rate of inflation as determined by the Consumer Price Index. The Treasury calculates a new interest rate for Series I bonds every six months. Series EE Bonds, on the other hand, are designed to adjust to the current level of interest rates. Every day the Treasury figures out what interest rate it would pay if it borrowed money for the next five years. Series EE bonds earn 90% of the six-month average of this five-year rate. While inflation rates and interest rates tend to be related, they are not locked together in any way. Inflation tends to move first and interest rates follow. There's detailed information about the conditions under which one series does better than the other in my book.


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