Why is my rate dropping to 4%?

Wednesday, July 28th, 2004
Categorized as: Yesterday's News (old post archive)

I bought a $10,000 EE Bond in September of 1992 which has been earning 6% interest. The bond is now worth $9,868.00. When running the Savings Bond Calculator to show earnings for 9/2004, I notice the interest rate dropping to just 4%. The bond will then be over its face value ($10,164). Why this drop in interest rate?

Tom’s response

The biggest misconception about Savings Bonds is that they have locked-in rates. Savings Bonds have always been an adjustable rate investment, although that’s much clearer when you buy them now than it was in 1992.

In addition to their market-based adjustable rates, Series EE Savings Bonds have an original maturity guarantee that promises your investment will double in value in a certain number of years. Your bond’s guarantee was 12 years – as you’ve noticed, this guarantee will be met. On new bonds the guarantee is 20 years.

Savings Bonds issued before May 1995 also had guaranteed minimum rates. However, the Treasury has the right to change the minimum rate when the bonds enter new maturity periods.

Your 1992 bond’s original maturity period was 12 years – it’s based on the time it takes to double in value. August 2004 is the last month of that maturity period.

For the next maturity period, which will last 10 years, you have no double-value guarantee, however, you will receive the Treasury’s current guaranteed minimum of 4%. In theory, if the prevailing level of interest rates was higher, you could earn more, but it’s unlikely.

That’s because with the 1992 bond, you receive the higher of the average market-based rate over the life of the bond or the minimum rate. Since market-based rates have been below the minimum for most of your bond’s life, it would take very high market rates for several years to raise its average market-based rate over the minimum guarantee.

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FDIC Insured Certificates of Deposit can pay 1 or 2% more than savings bonds when held for a similar length of time. See top CD Rates Below:

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June 1, 2010

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Tom Adams

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