Investors Are Beginning to Show Interest in Series EE Savings Bonds

A good many savers and investors have been attracted lately to a zero-coupon, tax-favored investment, paying about 9.5% interest and available at no commission charge.

The object of their fancy isn’t the newest exotic brainchild of some Wall Street firm. It’s Series EE U.S. savings bonds.

For a time in the 1970s and early 1980s, savings bonds had little more than patriotic appeal going for them. Their low yields simply weren’t competitive with the other types of investments that had been devised to keep up with high and volatile interest rates.

But, since the Treasury overhauled the savings bond program in 1982, some financial advisers have begun to give them serious consideration. Savers have even been heard to complain lately about the annual limit--$30,000 face amount--on purchases of Series EE bonds by any individual.

The basic features of savings bonds are familiar to most people. They are highly safe, backed by the full guarantee of the federal government, and easy to buy in small amounts.

Banks and savings institutions sell and redeem EE bonds, normally without any fee. You can accumulate them through a payroll savings plan at work--or you can buy them by mail from the Bureau of Public Debt, Washington, D.C. 20226.

Although the phrase “zero-coupon” evokes images of a hot new idea in the financial world, savings bonds have applied the principle behind it for decades.

Like other zero-coupon investments, Series EE bonds pay no current interest. Rather, they are sold at a price below their face value and appreciate over time as the government’s interest obligations on them mount.

Since Nov. 1, 1982, EE bonds have offered a floating return calculated twice a year at 85% of the going yield on five-year Treasury notes--provided that you hold the bonds for at least five years. If you cash them in before that, you get a lower return.

From last Nov. 1 through April 30, the EE bond rate was 10.94%. Now it is 9.49%.

Why settle for 85% of what you could get if you bought the Treasury notes themselves, which are also government-guaranteed?

Well, for one thing, you normally need at least $5,000 to buy the notes, while $25 will buy you the minimum denomination ($50 face amount) Series EE bond.

For another, since the return on EE bonds is adjusted twice a year, and is guaranteed not to fall below 7.5% for people who hold them five years or more, they offer some protection from the future ups and downs of interest rates.

Besides, the advisory firm United Business Service of Boston points out, “while the government may not tout them as such, EE bonds are an attractive means of sheltering income from taxes.”

As with other government securities, interest earned on Series EE bonds is exempt from state and local income taxes. Furthermore, no federal tax liability is incurred on EE bonds until they are cashed in. This generous feature, by the way, is the reason the Treasury put a limit on annual purchases by any individual.

The government, saddled as it is with a huge budget deficit, saves money by selling savings bonds, rather than having to borrow at market rates. People who buy them should be aware, however, that they are not getting top dollar on their investment.

But the new Series EE bond still comes attractively packaged for people with long-term savings goals.