Savings Bonds Misconceptions

Whether you are interested in buying US Savings Bonds or already have some in your portfolio, here are some of the most common misunderstandings about the investment. A better understanding about US Bonds can help determine whether or not to purchase or retain them.

When You Cash In

• Misconception: It doesn’t matter when you cash in bonds

• Fact: All US Savings Bonds over 30 months old will increase in value twice a year. Each bond can increase in value at a different time. The month of increase for many bonds is not the month of purchase. Nothing on the bond will tell you when this increase occurs. Since the interest is not posted daily or monthly like a bank savings account, it is possible to forfeit up to six months interest on each bond you own when redeeming your bonds. You will forfeit up to $400 for every $10,000 of bonds you own if you randomly redeem your bonds.

Which You Cash In

• Misconception: It doesn’t matter which bonds you cash in

• Fact: The interest rate that applies to each bond varies, depending on when the bond was purchased. All new bonds have a six-month floating interest rate based on the Treasury bond interest rate. Knowing the specific rates your bonds are earning is essential if you want to compare your bonds to other investments. It is also essential if you are going to redeem some of your bonds but are not sure which ones to choose.

Action At Maturity

• Misconception: You should cash in a bond when it reaches face value

• Fact: Any EE bond purchased since November 1986 is guaranteed to reach face value in 12 years. This is referred to as the original maturity date. However, this same bond will continue to earn interest for 30 years from the date of purchase. Bond owners who cash in bonds when they reach face value must report all the interest they have earned on the bonds up to that time.

Net Worth Calculation

• Misconception: Use the face value of a bond for net worth estimates

• Fact: A bond can be worth up to six times the face value. A bond can also be worth as little as one-half the face value. If a person has savings bonds with a face value of $20,000, the actual redemption value could be as low as $10,000 or as high as $120,000. This could make a significant difference in the way you regard and manage this investment.

Bond Values

• Misconception: Savings Bond values are easily determined

• Fact: According to US Savings Bonds: A Comprehensive Guide for Bond Owners and Financial Professionals, an estimated 55 million Americans have invested in savings bonds. Yet the Treasury does not send investors any statements of their accounts. Any other investment company would be chastised for this by the Securities and Exchange Commission.

To obtain the full interest rate on savings bonds, you must cash them in at exactly the right time. However, the bonds do not contain the information you need to figure out that timing. That information is contained in government tables that require considerable study to interpret.

Series EE bonds currently pay varying percents, depending on when they were issued. However, nothing written on a bond tells what interest rate that bond pays. That means you have no way to compare the return on your bonds with other investment options. If you want to redeem your low-interest bonds, and keep those paying higher interest, you do not have enough information to know which to sell and which to keep.

Bond Maturities

• Misconception: Maturity dates do not require owner action

• Fact: Over a billion dollars worth of savings bonds - all those issued before July 1, 1952 - have stopped earning interest. However, most of the owners of those bonds do not know that since they have never been notified by the government. Anyone who still owns those bonds is forfeiting all current interest on the value of those bonds.

Other bonds will mature, and the government does not plan to notify the bond owners. This can have serious repercussions.

By law, when your bonds reach final maturity and stop earning interest, you are required to report all the accumulated interest on your tax return - even if you don’t cash them in. In other words, although you may not know the bonds have matured, you could be hit with back interest and penalties from the Internal Revenue Service.

Savings Bond Tabulations

Help is available through a service offered by The Savings Bond Informer, Inc. in Detroit. Fax: 313-843-1912 or call 800-927-1901.

The service works like this: For every bond you own, you send the company the denomination and the month and year you bought the bond. You will receive a report (one that you will never get from the government.) It tells you the current value, exact interest rate, and total accumulated interest for each bond. It also tells you when each bond increases in value so you can cash it in at the best time.

The report costs $15 for 1-10 bonds, $24 for 11-25, $34 for 26-50, $49 for 51-100, $59 for 101-200, $69 for 201-300, $79 for 301-400 and $89 for 401-500 bonds. Telephone orders are for 25 bonds or fewer. If you own more than 500, you can call for a quote.

Two books are also available: Savings Bonds: When to Hold, When to Fold and Everything In-Between and US Savings Bonds: The Definitive Guide for Financial Professionals.

Informed Management

US Savings Bonds have valuable investment characteristics, namely security, liquidity, guaranteed return and tax deferral, in addition to the patriotic purchase motive. However, to manage this investment effectively, one must either become a student of bond terms and values or use a reporting service.