"Glitch" with Electronic US Savings Bonds

For my entire life I have either given, or received, US savings bonds for birthdays. It is now an antiquated notion, however they have their merits. For example, they are exempt from certain taxes of used for educational purposes. Granted there are an amalgam of exceptions and restrictions.

There are two types of US savings bonds available for purchase: Series EE and Series I. Series EE effectively replaced Series E bonds, but operate under the same interest bearing principle - they have a fixed interest rate. The major difference between EE and E bonds are face value. EE Bonds are sold at half face value, and are (at the moment – Guaranteed to reach face value 20 years after purchase). This guaranteeing of maturity has changed over the years. It was 7 years, then 9, then 15, now 20. However, since the fixed interest rates that are currently affixed to these bonds will not produce a doubling in 20 years, there is a one time interest addition that makes this guarantee – well… guaranteed.

I Series Bonds are inflation based, have an interest rate adjusted every six months and are purchased at face value. The total interest rate is an aggregate rate of the inflation based variable interest (which during periods of negative inflation – deflation, will be 0%, and a fixed interest rate. With this, it is possible to have periods of zero interest. The variable interest is readjusted on May 1 and November 1, but will not take effect until six months after purchase date.

To explain further, if one buys a Series I bond in July (regardless of the day of the month, all bonds will be effective the first day of the month), that bond will receive the fixed rate at the time it was purchased plus the variable interest rate set forth in May. Once the new rate is established in November, the new variable rate will begin to affect this July bond in January. If an I Bond is bought August then the new interest rate will become effective in February. September – March, October – April.

Digressing for a moment, one may purchase personally $5000 worth of EE Bonds and $5000 worth of I Bonds in a calendar year for themselves. One may purchase as many as they with for gifts without limits. The US government has now created a new mechanism to purchase US savings bonds…electronically. Now one may ALSO buy up to $5000 electronic EE Bonds and $5000 electronic I Bonds. These may be purchased at www.treasurydirect.com.

One may purchase both EE and I bonds from Treasury Direct, but both at face value. While you can purchase bonds to the penny (i.e. an EE Bond for $33.29 or I Bond for $389.02), EE bonds are purchased to the penny – at that value. This means that there is no face value to live up to in 20 years, so there is no interest adjustment. The government found an interesting way to manipulate the concept that my great-grandfather adored.