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Savings-Bonds-Alert: Fixed-rate EE Savings Bond features

Friday, April 15, 2005

Fixed-rate EE Savings Bond features

Do you see any value to the new fixed-rate EE bonds? It seems to me that I bonds are the only real choice now. Tom's response Much will depend on what kind of rate the Treasury actually gives to the new EEs. That said, one of the interesting things that the new EEs have is a fixed yield curve. That means you'll know in advance exactly what you'd earn at the 1, 2, 3, 4, and 5 year points. (You have to adjust the rate for the 3-month early withdrawal penalty.) For example, if they set the new EE rate at 3.5%, the yield curve would be:
  • 1 yr - 2.63%
  • 2 yr - 3.06%
  • 3 yr - 3.21%
  • 4 yr - 3.28%
  • 5 yr - 3.50%
During the six-month period when these rates are available, they could become higher than equivalent short term T-Bill or CD rates, which would create an interesting situation. Another interesting feature is that with interest-rate-based investments like corporate and government bonds and bond mutual funds, the value of your investment goes down as interest rates go up. That's not going to happen with EE bonds, which gives them additional horsepower. If interest rates rise over a period of years, there's also nothing to keep you from redeeming any EE that's older than one year and buying a new one with a higher rate. Whether this will make sense will depend on how long you intend to keep the higher rate bond and whether you expect your tax rate to decrease during that period.


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