The How and How Much of U.S. Bonds

Question: My children receive a U.S. Savings Bond, Series EE, at each birthday and other holidays. Until they got their Social Security numbers last year, the bonds had my Social Security number on them. Could you tell me something about U.S. Savings Bonds? How long does it take a bond to mature? Do you continue to earn interest after it has matured? Who pays taxes on them and how is it done?--D.M.

Answer: It’s perhaps odd, in the light of last October’s stock market crash and the resultant interest in no-risk investments, that we don’t hear more about the trusty old U.S. Savings Bond, because you can’t get safer than that . However, they’re not for investors needing immediate income, which is why they have always been an ideal gift to children--the interest is realized only when the bond is redeemed.

The Series EE bonds (like their predecessor before 1980, the E bonds) come in face-amount denominations of $50, $75, $100, $200, $500, $1,000, $5,000 and $10,000. But, as Kathy Macias, a spokesperson for the Federal Reserve Bank in Los Angeles, points out, they are sold at half of their face amount: $25 for a $50 bond, $5,000 for a $10,000 bond.

Both the maturity and the interest, however, have gotten a bit more complicated to compute since ‘82, when the Treasury Department went to a variable-rate program. One of the prior objections to savings bonds had been that you were locked into a fixed interest rate, which, five or ten years down the road, could be dramatically under the going market rate.

In ‘82, Macias adds, variability was introduced--every six months, in May and November, a new six-month rate is announced and it is pegged at 85% of the yield on five-year Treasury securities.

One of the comforting things about savings bonds and the variable rate, though, is that there is a guaranteed minimum of 6% a year. Currently, then, Macias says, maturity is about 12 years and the interest rate at its last adjustment this past May was put at 6.9%. Because of this, the maturity may be less than 12 years, but the bonds will continue to draw interest for the full 12 years.

Will they continue drawing interest after maturity? There’s no guarantee, of course, but if history is any criterion, the assumption can be made that extensions by the Treasury will be made. As a matter of fact, Macias says, the only savings bonds not drawing interest today are some of the old World War II E bonds issued in the early 1940s: In bits and pieces, they were extended a full 40-plus years before interest was finally cut off.

It isn’t necessary for you to change the Social Security numbers on the bonds you’ve already given your kids--from yours to theirs--because the tax (due in the year of redemption) is payable by the person whose name is on the bond. There’s time enough, then, for the change in Social Security numbers.

A savings bond, Macias said, can be redeemed any time after six months, but if done any time before maturity, you won’t get the full face amount of the bond, and you have to hold it at least five years to get the variable rate. Otherwise, you’ll get the minimum, 6%. Between five years and maturity, though, you’ll get an average of the variable rates.

But for kids, looking at college expenses about 12 years down the road, Savings Bonds are an ideal gift.

Campbell cannot answer mail personally but will respond in this column to consumer questions of general interest. Write to Consumer VIEWS, You section, The Times, Times Mirror Square, Los Angeles 90053.