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Many young people receive EE Series Savings Bonds as gifts to help save up for college, weddings, and other upcoming expenses. This is very beneficial for donors, since they cost only half of their face value in paper form. Bonds are valid for up to 30 years, but they can be cashed at almost any moment of life.
Brian McGinty Karatbars Gold New Introduction Brian McGinty Brian McGinty (Jul 2019).
Historically, savings bonds have been one of the most popular investments in the United States for over a hundred years. Of these, perhaps none of them is more famous than the EE Series Savings Bonds. Issued by the US Treasury to help raise money to finance the government, the EE Series Savings Bonds allow investors to buy bonds at much lower denominations than traditional corporate or municipal bonds, which sometimes require $ 10,000 or $ 100,000 per bond.
How EE Series Savings Bonds Work
EE Series Savings Bonds work differently depending on whether you have your own EE Savings Bonds or EE Series Paper Bonds.
Electronic Series EE Savings Bonds
- EE Series electronic savings bonds are sold at face value. If you want to invest $ 50, you will receive an EE electronic series savings bond for $ 50, and it will be worth the full cost if it is available for repayment.
- EE Series electronic savings bonds can be purchased in the amount of 25 US dollars or more, "for a penny." If you have $ 547. 32 you want to invest in, you can do this by making them an excellent choice for small investors with limited funds.
- The purchase of EE Series Electronic Savings Bonds is limited to no more than US $ 25,000 per calendar year.
- EE Series Electronic Savings Bonds are issued to the indicated account. You will not receive any physical paper link.
Series of certificates of physical paper EE savings bonds
- EE Series Paper Savings Bonds Are For Sale half face value, if you buy a bond with a face value of $ 5,000, you will pay $ 2, 500 in cash today.
- EE Series Paper Savings Bonds are available in denominations of 50, 75, 100, 200, 500, $ 1, 000, 5, 000, and 10,000 US dollars.
- There is a maximum investment of $ 5,000 (face value of $ 10,000) per calendar year.
How You Make Money Investing in EE Series Savings Bonds
When you buy EE Series bonds, you are lending money to the United States government. From time to time, the government changes the rules on savings bonds, so how your EE series bonds work depends on when you purchased them. According to the Treasury, EE Series bonds purchased on or after May 1, 2005, receive a fixed rate of return, letting you know which bonds are always worth. EE bonds purchased between May 1997 and April 30, 2005 are based on the 5-year yield on Treasury securities and receive a variable market rate of return. ” In other words, the EE series bond has again become a fixed interest bond since April 30, 2005. Eight years earlier, the bonds had variable interest rates, which means that the investor would not know the interest rate that his or her bond paid since it would change taking into account general interest rates. This can be good in times of inflation, bad in periods of stable economic growth and low interest rates.
Bonds of the EE series are a type of bonds with a zero coupon. With a traditional bond, you can invest $ 10,000 and earn 5% of coupons per year.
Each year you receive an income of $ 500. In the USA, companies usually make payments twice a year, so you will receive $ 250 on June 30 and $ 250 on December 31. When the bond has matured, you will receive the face value of the bond ($ 10,000). With zero coupon bonds, on the contrary, you never get cash interest income. Instead, bonds are issued at deep face value discounts and are calculated based on the fact that they are worth the face value of the bond at maturity.
Maturity Date for EE Series Savings Bonds
The unique thing about EE Series Savings Bonds is that the maturity of paper bonds varies depending on when the bond was issued. Here is the chart:
Release Date Original
January 1980 - October 1980 = 11 years
November 1980 - April 1982 = 9 years
May 1981 - October 1982 - 8 years
November 1982 - October 1986 - 10 years
November 1986 - February 1993 = 12 years
March 1993 - April 1995 = 18 years
May 1995 - May 2003 = 17 years
June 2003 - present = 20 years> In other words, if you were to buy a bond in January 1983, the chart will tell you that your maturity is 10 years, i.e. if you bought bonds for $ 5,000 face value of the EE series, you will pay $ 2,500 in cash and 10 years later (January 1993), the bond will cost the full face value ($ 5,000). You would never receive any money by mail, but instead, each year the value of your interest would be added to your bond, so it would increase in value. You have the opportunity to continue to hold the bond for a period of up to 20 years, which means that it can cost much more than the face value, $ 20,000+ is possible. This moment confuses many new investors, and it is important for you to understand.
How many percent will my EE series pay?
The EE Series Investment Acceptance Rules were updated in April 2009 and vary depending on whether you invest in paper bonds or electronic bonds. Individuals, corporations, public organizations, private organizations, associations and fiduciaries can now own physical paper bonds. Individuals, trust funds, companies, corporations, partnerships, and comparable companies may create TreasuryDirect accounts and their own electronic savings bonds.
There are several additional requirements for participating in investing in EE savings bonds in the United States. You must have your social security number and be:
- U. S. Overseas citizen who still has a U.S. address.
- A civil servant of the United States, regardless of place of residence.
- Minor US Savings Bonds, including EE Series Savings Bonds, are the only persons directly held.
- For more information, see our EE Series Bond Relationship Guide.
How do bonds work?
A bond is a standard and very simple security. By issuing bonds, the issuer (borrower) informs the buyers (creditors) what profitability they can expect. For example, a bond is issued for 5 years with a quarterly payment of coupon income (which will be discussed below). That is, every three months the creditor will receive interest on borrowed money, and after 5 years he will receive the full amount.
When a bond is traded on an exchange, it can be sold earlier than this period at the current price, taking into account the time remaining to maturity. But if the sale is made, for example, in the unfavorable economic situation in the country, or the issuer has difficulties, then the value of the bond may decrease, and apart from the loss, its sale will bring nothing. Nevertheless, the main and advantage of the bond, when compared with the stock, is the urgent nature and availability of a certain circulation period. After this period, the issuer must redeem the bond at par. This means that, even if its price falls at some point, by the maturity date it will return to 100%. In turn, the stock is a perpetual security, and when its price falls, no one knows when it will return to its previous level, or whether it will return at all.
Therefore, non-professional players can be advised of the following: avoid buying bonds with a long maturity (5-10 years). It is better to buy bonds with a maturity of 1-2 years. Then, even if there are problems on the market and there is no possibility to profitably sell bonds in the current situation, you can wait for redemption and sell your bonds at the purchase price.
Various legal entities can act as an issuer of bonds, ranging from small LLCs to large corporations. Also, the issue of bonds is allowed for individual municipal and republican authorities, government bodies. In the Russian Federation, the Ministry of Finance acts as the issuer of federal loan bonds.
Is it possible to earn money on bonds in Russia today?
The yield of bonds is greatly affected by the reliability of the issuer. The higher it is, the lower the yield, and vice versa. The yield on Russian OFZs today is 10-11% per annum, depending on the maturity. But the yield on corporate bonds of large Russian issuers (Gazprom, Russian Railways, Aeroflot, etc.) is 12-14%. The yield to maturity in 2018 of bonds of a smaller issuer, say, the Moscow Credit Bank, reaches almost 18%! Obviously, higher returns also mean more serious risks. In the pursuit of interest, you can not get anything. Example: today the bonds of the World of Construction Technologies will bring their owners a yield of 290% per annum by 2019! However, now these bonds are defaulted, it is likely that they will not be repaid by the issuer, since the size of its obligations on bonds already exceeds the value of its net assets.
How to enter the bond market?
Many bonds are traded on the Moscow Exchange. If you are a private investor and decided to buy bonds, then it is better to do it yourself on the stock exchange, this option is the simplest and cheapest. As with the purchase of shares, you need to start by opening an account with any broker that can give access to the bond market, and placing money in this account. Trades can be conducted independently, after free connection of the information-trading system (for example, the ITS QUIK popular in Russia), or you can engage a broker in the auction by phone giving him a command to buy a certain number of bonds.
For most bonds, trading is carried out with a minimum lot of 1 bond and a par value of 1 thousand rubles. That is, you can buy bonds without having a lot of money. The transaction is concluded with the payment of a commission to the broker and the exchange. However, the amount of this remuneration is insignificant, it is only 0.05-0.1% of the turnover. That is, to start is not at all scary and not expensive, the main thing is desire!
How to calculate bond income?
Bonds may be discount and interest. All of them have a certain face value, taken as 100%. Then the price of the bonds is indicated at the auction as a percentage of the face value, regardless of its value in monetary terms. For example, a bond price of 99.4 does not mean that it costs 99 rubles 40 kopecks, but indicates a percentage of the face value. At a face value of 1000 rubles, by selling a bond at a price of 98.6, you will receive 986 rubles for it.
Discount bonds are placed by the issuer at a price below par, and they are repaid at par. No additional payments for the circulation of such bonds are provided. Therefore, the bondholder’s income is equal only to the difference between the purchase price and the redemption price.
Among the bonds traded on the stock exchange today, the majority interest (or coupon) bonds. They are placed at a price close to face value. In principle, the price can be either lower or higher than the face value; current market conditions are important here. However, during the circulation of such a bond, a periodic payment to the creditor of interest, which is called a coupon, is provided. Usually they are paid once a quarter. It is to this process that the expression “cut coupons” owes its appearance, which originally means cutting off a coupon from a bond, which gives the right to receive interest. Of course, today no “haircut” is made, since the circulation of bonds takes place in electronic form. However, every three or four months, the lender receives interest on his bonds for the use of his money. This interest is called a coupon (coupon income).
While working on the bond market, you may come across the concept of “accumulated coupon income”. NDC is part of the coupon interest income on a bond, which is calculated in proportion to the number of days that have passed since the coupon bond was issued or the previous coupon income was paid.
The transfer of NKD is similar to dividends on shares: the amount is added to the free cash on the brokerage account. However, if the share price immediately decreases by approximately the size of the paid dividends, then the main price of the bond on the day of the coupon payment does not change (with timely transfer of funds and avoiding technical default). The change concerns only coupon income, which will be reset to zero, which leads to a decrease in the total final price of the bond.
The accrual of income and the return of the nominal value of a bond is characterized by simplicity and the absence of the need for direct participation of the bondholder.
When the maturity day comes, the bond from your portfolio “disappears”. After a few days, its face value along with the accumulated income is credited to your brokerage account. After that, you can withdraw the money received to your bank account, or send it to the purchase of other bonds.
Eurobonds - for those who trust the currency more
Private investors can find in the modern Russian bond market not only ruble yield, by the way, very high. They can become owners of Eurobonds, which are also called Eurobonds. Eurobonds are not denominated in rubles, but in currencies (usually euro or dollars). The main market for their circulation is Western Europe, which is clear from their name. Of course, with the current openness of financial markets, a Russian investor can independently enter the European bond market. But let's not forget about the whole list of constraining factors, which includes, first of all, a large initial investment amount. Suffice it to say that the cost of a standard lot in the Eurobond market is 500 thousand dollars! In addition, add to the list of problems the lack of knowledge of the language and rules of international exchange trading. However, do not despair. Eurobonds with a par value of 1 thousand dollars and a minimum lot of 1 bond are traded on the Moscow Exchange. That is, having one thousand dollars, you can get down to business. Eurobonds of the Russian government are most popular, and bonds of some Russian companies, for example, Rosneft, VTB Bank, etc. are also in demand. Moreover, now the yield on these bonds is up to 5.5% per annum in US dollars.
For those who are prevented from starting fear
And yet, while the Russian investor is making very timid steps in the bond market. Bonds attract many, but fear is not the best partner for earning on the exchange. Although you don’t need to be afraid, you can always use the services of a broker who will professionally and lucidly devote you to the main details of the process. In addition, various training events are held, which you can participate in without problems. And yet, if you are not ready for independent work yet, you can enter the bond market by buying shares of bond mutual funds or structural products with bonds or even Eurobonds. Units of mutual funds are more reliable. However, remember that investments in mutual funds are long-term, they are designed for at least a year, and more often for a period of 3 to 5 years. Choosing a management company, one should proceed not from profitability for the last year, but from profitability for the last 3-5 years or more. It is stability that matters.
Those who plan to trade bonds, we recommend:
- Do not chase the maximum profitability, as it usually carries the greatest risk.
- Do not part with sales transactions. Such behavior requires high professionalism and great experience.
- Do not buy bonds with long maturities (5 years or more). При ухудшении экономической ситуации такие облигации могут подешеветь вполовину и более, а вам придется ждать срока их погашения.
- Покупать только ликвидные облигации, сделки по которым совершаются ежедневно. Чтобы избавиться от неликвидной облигации, придется ждать срока погашения.
- Покупая облигации, обращайте внимание на спрэды (разницу между ценой покупки и продажи), которые на рынке облигаций могут составлять несколько процентов. Спрэд может сделать относительно небольшую доходность по облигациям гораздо привлекательнее. For example, a spread of 3% will bring your bond yield of 15% closer to a bank deposit with a yield of 12%! And this is a tangible increase.
With these little tricks, you can successfully realize yourself in the bond market. If you wish, any difficulties can be overcome! Be that as it may, experts recommend that private investors take a closer look at the bond market, considering them a truly worthy alternative to bank deposits.