What is the difference between EE and I Bonds?

Both Series EE savings bonds and I savings bond are safe, low-risk savings products issued by the U.S. Treasury.  The biggest difference is the how the interest rate you receive on the bonds is derived.  EE bonds earn a fixed rate of return while I bonds earn a combined fixed rate and added adjustment rate based inflation rates.

More technically, EE bonds issued May 2005 and after earn a fixed rate of interest.  Since these bonds earn a predetermined fixed rate of return, you know what the bonds are worth at all times.  The fixed rate is determined by adjusting the market yields of the 10-year Treasury Note by the value of components unique to savings bonds, including early redemption and tax deferral options. 

Interest rates for new issues of the EE bonds are adjusted each May 1 and November 1, with each new interest rate effective for all bonds issued in the six months following the adjustment.  The present rate for this six month cycle of EE bonds can be found on the U.S. Treasury’s financial services website, TreasuryDirect which is located on the web at www.treasurydirect.gov.

I bonds have an annual interest rate that reflects the combined effects of a fixed rate and a semiannual inflation rate.  The bonds earnings rate is a combination of a fixed rate of return, set at the time of purchase, plus a variable rate that is based on the semiannual inflation rate established on CPI-U changes announced in May and November.

These bonds are very similar to TIPs or Treasury Inflation-Protected Securities.  The key difference between I bonds and TIPS is that they are non-marketable securities which means they cannot be bought or sold in secondary securities market like TIPS can.  I bonds are registered in names of individuals or, for paper bonds only, their fiduciary estates.  These bonds are an accrual-type security.  They increase in value monthly as bond interest earned is added to the bond monthly and is paid when you redeem the bond or cash the bond.

EE bonds purchased in paper form are sold at half the face value which means you would pay $25 for a $50 bond.  EE bonds purchased electronically via TreasuryDirect are sold at face value; i.e., you pay $25 for a $25 bond.  The paper bond purchases will take time for the bond to reach maturity because it is dependent on the interest rate.

The EE bond minimum term of ownership is one year and the interest earning period is for 30 years.  There is an early redemption penalty that stands at a forfeit of three of the most recent months’ interest if redeemed before 5 years, with no penalty if held for five years or more

I bonds are sold at face value, if purchasing a $50 bond you would pay $50.  As with EE series bonds, if you redeem the bond within the first five years, there is a penalty that is forfeiture of the three most recent months interest.  After five years there is no redemption penalty.

Tags: bonds, EE bonds, I bonds, inflation, interest rates, savings, Tips, U.S. Treasury

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