How To Earn 3.5% Interest On US Savings Bonds!

December 2nd, 2011 by

Buy an EE Series US Saving Bond
This sounds too good to be true. You must be thinking “What’s the catch?”

There is one catch, and its a big one:

You cannot redeem the savings bond until maturity (which is 20 years after the bond is issued). If you need to cash-in the bond, you will earn a measly 0.6% minus any early withdrawal penalties.

That is the only catch but there is one other limitation.

The maximum amount of EE bonds a person can purchase is $10,000 per year.

This 3.5% interest rate is not a temporary teaser rate or subject to change. However, you will not see this rate advertised anywhere on the Treasury Department website.

You will see the following statement:

At a minimum, the U.S. Treasury guarantees that an EE Bond’s value will double after 20 years, its original maturity, and it will continue to earn the fixed rate unless a new rate or rate structure is announced. If a bond does not double in value as the result of applying the fixed rate for 20 years, the U.S. Treasury will make a one-time adjustment at original maturity to make up the difference. Series EE bonds earn interest for 30 years.

Source: US Treasury Dept

When I read this statement, I thought it was odd. At the time that this article was researched (11/1/2011)  the interest rate on the EE series savings bond was 0.6%. There was no way that an interest rate of 0.6% could lead to doubling of the value of a bond in 20 years. Then, I made use of the rule of 72 to figure out how long it would take for a bond to double in value. The rule of 72 states that if you take the number 72 and divide it by the interest rate you get the number of years it will take for your money to double.

For anything earning less than 1%, it would take more than 72 years to double your money.  As this is the case, the effective interest rate on EE Series savings bonds had to a lot more than 0.60%. Using semi-annual compounding over 20 years, a $1000 bond will become $2001.60 (double in value) with an interest rate of of 3.5%.

How good is a 3.5% interest rate?

At the time this article was written (11/1/2011) that is about 1% higher than the rate a 20 Year Treasury bond is paying.  This is pretty good considering that you are getting about 33% more interest for the same level of risk.

This lesson is part of our Free Guide to Buying Savings Bonds.  Continue to the next lesson here.
  Want to learn how to generate more income from your portfolio so you can live better?  Get our free guide to income investing here.

 

 

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