A Series EE Bond is a savings bond issued and backed by the U.S. Treasury Department. You purchase these bonds at a 50% discount to their face value—meaning a $100 bond costs you $50 upfront. The bond gradually accrues interest and reaches its full face value at maturity, which is guaranteed within 20 years. The Treasury adjusts interest rates semi-annually based on market conditions, so your actual earnings depend on the rate environment when you buy.
How It Works
When you buy a Series EE Bond, you're essentially lending money to the federal government. Your $50 investment grows over time through monthly compounding interest. The bond will be worth at least $100 at the 20-year mark—the Treasury guarantees this minimum return. You can redeem the bond after one year, but if you cash it in before five years, you'll forfeit the last three months of interest as a penalty. After five years, there's no redemption penalty. Series EE Bonds continue earning interest for up to 30 years total.
Why It Matters for Investors
For high-net-worth investors and entrepreneurs, Series EE Bonds offer a unique combination of absolute safety and tax advantages. They're ideal for conservative portfolio allocation and educational savings through the education savings plan benefits. The bonds are exempt from state and local income taxes, and if used for qualified education expenses, they may be exempt from federal taxes too. They're also useful for portfolio diversification, as they're uncorrelated with stocks and bonds. However, current interest rates on EE Bonds are typically lower than other fixed-income options, so they work best as a small, strategic portfolio component rather than a primary investment vehicle.
Example
You purchase a Series EE Bond for $5,000 when the semi-annual interest rate is 2.5%. Over 20 years, the bond grows to $10,000 through monthly compounding. If you needed access to capital after seven years, you could redeem it with no penalty (since you're past the five-year mark), receiving approximately $7,200. Alternatively, you could hold it for the full 30-year earning period, during which it would accumulate additional interest beyond the guaranteed $10,000 face value.
Key Takeaways
- You purchase Series EE Bonds at 50% of face value with a guaranteed minimum return at 20-year maturity
- Interest compounds monthly and is exempt from state/local taxes; potentially exempt from federal taxes if used for education
- Early redemption within five years incurs a three-month interest penalty; no penalty after five years
- Best used as a conservative, diversified portfolio component due to relatively low interest rates compared to other fixed-income securities