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In Need of Comfort? Look at Series EE Bonds

November 06, 1994|From Reuters

As interest rates move up, so do the advantages of holding good old plain vanilla Series EE U.S. Savings Bonds.

"They are a comfort for some people, one of the few investments you can still physically take hold of, a possible college investment and a wonderful emergency fund," said Dee Lee, a Harvard, Mass., financial planner.

They are now paying more than they have since March, 1993. The Treasury Department announced last week that the average rates on the bonds would be 5.92% through April 30.

That's an increase from the 4.7% that had been in effect for the previous six months and not a bad figure considering that the interest they pay is exempt from state and local income taxes (and in some cases federal income tax). Moreover, the bonds are fully backed by the U.S. government.

You can buy a bond for as little as $25 or as much as $5,000 at just about any bank, Federal Reserve Bank or through automatic payroll deduction plans. Hold it for at least five years and you will earn the higher of 1) the average of the semiannual rates for the period you held the bond or 2) the guaranteed minimum, which is currently 4%. Hold it only six months and you'll at least get the guaranteed minimum.

That's why Lee suggests that Savings Bonds make a good emergency fund: They tend to beat money market mutual fund returns but can easily be cashed in when you need them. They also offer a bit of a psychological incentive to be tough-minded about what you consider an emergency: You might drain your emergency bank account for a good suit sale or a broken VCR; you'd be a little less likely to cash in your Savings Bonds.

Series EE bonds offer interest rate protection that comparable long-term savings vehicles don't: Lock up a certificate of deposit for five years and you get the rate announced today, for five years, no matter what rates do. But because the Treasury declares a new average rate for Series EE bonds every six months, their returns will float up as interest rates do.

The average rate is based on a formula of 85% of the previous six months' average market rate on Treasury notes and bonds with five years until maturity.

Thus the Series EE bond gives you a little bit of short-term protection (cash out whenever you want, rates are adjusted every six months) and a little bit of long-term yield.

They also offer some college savings advantages worth considering. If you earn less than $66,200 and cash in your bonds to foot your child's tuition bills, the cumulative interest is tax-free.

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