Changes to U.S. Savings Bonds in 2003

Savings bonds are issued by the U.S. Treasury Department. They are non-marketable securities, which means consumers may not sell or buy them from anyone except an issuing and redeeming agent authorized by the Treasury Department. Savings bonds are registered securities, owned exclusively by the person or persons named on them.

I bonds and Series EE savings bonds are accrual securities. They earn interest monthly at a variable rate and the interest is compounded semiannually. Consumers receive earnings when they redeem the bonds.

Series HH savings bonds are current income securities. Unlike the EE bond, the HH bond does not increase in value. HH bonds are issued only in exchange for Series E or EE bonds with current redemption values totaling at least $500 at the time of exchange. HH bonds are issued in denominations of $500, $1,000, $5,000 and $10,000. To be eligible for exchange, E and EE bonds must be at least six months old but not more than a year past final maturity. Interest is paid semiannually to the owner’s checking or savings account at a bank or savings institution.

Barbara Mobley, an Extension financial management specialist, says HH savings bonds issued on or after Jan. 1, 2003, will earn 1.5 percent interest for their initial 10-year maturity period.

“The new rate replaces the 4.0 percent rate that has been in effect since March 1993.

The change is being made to better align the effective return on savings bonds with marketable security yields,” says Mobley.

The 1.5 percent rate also applies to older HH bonds that enter into an extended maturity period on or after Jan.1, 2003. If Series HH bonds issued prior to Jan. 1, 2003 are less than 10 years old on that date, they retain the current interest rates until the end of their 10-year initial maturity period. Also, if bonds entered the 10-year extended maturity period before Jan.1, 2003, they retain the current interest rates until final maturity (20 years after the date of issue) when they stop earning interest.

Another change involves the minimum holding period applying to U.S. savings bonds.

“The minimum holding period for U.S. savings bonds will be extended from 6 to 12 months, beginning Feb. 1,” Mobley says. Series EE and I bonds issued on or after Feb. 1 will be affected. The minimum holding period is the length of time from issue date that a bond must be held before it is eligible for redemption.

“Savings bonds are designed to be a long-term savings vehicle,” says Mobley. This new holding period will prevent purchasers from taking advantage of the current spread between savings bond returns and historically low short-term interest rates by cashing in bonds after six months.

All other terms and conditions applying to Series EE and I bonds remain unchanged. . EE bonds earn a market-based interest rate at 9 percent of an average of 5-year yields of marketable Treasury securities. I bonds earn a composite rate (a combination of a fixed rate set at purchase for the life of the bond and an inflation rate that is adjusted semiannually based on the consumer price index for urban consumers). Interest on both series accrues monthly and compounds semiannually.

More information on the terms and conditions applying to U.S. savings bonds can be found at http://www.savingsbonds.gov/.

SOURCE: Barbara Mobley, Financial Management Specialist, Alabama Cooperative Extension System.

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