The Value of Savings Bonds

I'm wondering why, if EE bonds mature in 30 years, the Web site for the Treasury bonds mentions penalties for cashing in before five years? What happens at five years? Are the bonds face value? Or would I just get the interest plus what I paid for the bond at the time? For example, if I paid $50 for an EE bond whose face value is $100, what do I get after five years?

Your bond would be worth $50 plus interest if you cashed it in after five years. The specific amount you would have after five years would depend on the interest rate when you purchased the bond. The bonds are designed to reach face value after 20 years (or the government makes up the difference if they don't).

Interest is added to the bond monthly and paid when you cash in the bond. If you cash in during the first five years, you'll have to forfeit the last three-months' interest as a penalty. Otherwise, the bond continues to earn interest for 30 years.

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If you bought an EE bond in May 2005 or later, the bond earns a fixed rate of return. For example, EE bonds purchased in November 2006 earn a fixed rate of 3.60% for the next 20 years. The bond continues to earn interest for 30 years, but the rate can change after 20 years.

EE bonds purchased from May 1997 to April 2005 earn a market-based interest rate. In November, that rate was 4.39%, and the rate will be set again on May 1 (those are annual rates, even though they change after six months). Bonds purchased before then earn variable interest rates (updated every six months) based on the year they were purchased.

Paper bonds are sold at half their face value, but bonds sold through TreasuryDirect are sold at their face value (a $25 bond, for example, is sold for $25). They both earn the same interest rate, it's just that the terminology is different.

Sound confusing? A service like SavingsBonds.com makes it easy to monitor the value of all of your bonds and keep track of interest-rate changes. You and your family members can monitor an unlimited number of bonds for $24.95 per year.

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.