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Author: Mark12547 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35658  
Subject: Re: I vs E Date: 3/19/2006 12:35 PM
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Well, for an EE-bond at 3.2%, all you have to do is run it through a compounding calculator for 30 years to get your before-tax return.

Actually, there are two wrinkles in that:

1. At "initial maturity", currently 20 years from month of issue, if the value of the EE-Bond isn't at least twice the issue price (for paper bonds, the redemption value has reached face value since paper EE-Bonds are issued at half of face value; for "book entry" EE-Bonds purchased through TreasuryDirect, the value is twice the purchase price), there will be a one-time step-up of value to be twice the issue price. See: http://www.publicdebt.treas.gov/sav/savmat.htm

A $100 EE-Bond issued at $50 at 3.2% would thus get a one-time step-up in 20 years from a redemption value of $93.88 to $100.00. (Using the "Rule of 72", to double in 20 years would require an APY of 3.6%.)

2. The interest rate of the last ten years (between initial maturity at 20 years and final maturity at 30 years, this period called the "extended period") has not been determined yet and, furthermore, the Treasury doesn't have to say what the interest rate will be until the savings bond enters its "extended period." See http://www.publicdebt.treas.gov/sav/savexten.htm

So, in the above example, that $100 EE-Bond would earn whatever future interest it would have during the "extended period" based on the $100 it would be worth on its "initial maturity" date. Since we don't know (and might not know for 20 years) what that interest rate will be, all we can say for certain is that the EE-Bond would be worth more than face value in 30 years, but not how much more.
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