Investing Question

[rootaxs]

I'm researching EE bonds and was curious about one thing.

If you purchase a paper EE bond, it's sold at half the face value (e.g. $25 for a $50 bond). For simplicity sake, does that mean if i sell it within a year i get $50 back or is that $50 the amount i'll get after the 20 year maturity period? (plus interest of course).

I'm trying to see what the advantages would be between:
a) Buying paper EE bonds at half face value, and
b) Buying electronic EE bonds at full face value

I know you earn interest only for the amount you actually paid and get a 3-month tax penalty when cashing in early, but other than that i'm a bit confused on their pro's/con's. Just looking at "half face value price" makes it seem that it's the better option.

Any ideas?

Thanks.

 

[DaveSimmons]

You might try www.fool.com.

I don't buy bonds yet myself (mutual funds instead), but I'm pretty sure $50 is the value at _maturity_. The value doesn't instantly double, it takes the full 20 years. After 20 years you get just $50, not $50 "plus interest."

The i bonds are supposed to be good right now, but with rates so low you might be just as well off keeping the money at INGDirect.com.

 

[Pantoot]

Either bond will appreciate at 3.5% a year (assuming you buy during the current offering period.) It doesn't matter if you buy a bond that says 50 on the front for $25, or you buy an electronic for $25, they are the same.

The face value on the paper bond represents what the bond is guaranteed to be worth (at the minimum) after 20 years. Guess how much $25 with an interest rate of 3.5% will be worth after 20 years?

 

[woowoo]

Savings bond calculator

 

[rootaxs]

Thanks for the responses.

DaveSimmons, that doesn't seem to make sense to me - if i purchased at half face value and it's worth full face value at 20 years, what then if i purchase at full face value? The government gives you the same rates whether you buy electronically or get the paper version. Does that mean i won't be earning interest with the one bought at full face value?

Pantoot, That's where i'm confused. The government has given 50% discount rates for paper bonds as far as i've seen regardless of what the rates are for that period.

Unless i'm getting this wrong, what i deduce from both your posts is that:
- Buying paper bonds (half price), earns interest that makes it's full face value in 20 years. The interest is what makes it reach full face value.

And following that trail of thought:
- Buying electronic bonds (full price), earns interest but you only get the full face value at maturity???

woowoo, Thanks for the link. Doesn't really relate to my question though 🙂

 

[Pantoot]

Rootaxs, I understand your confusion.

I think the problem is that the rates on the bonds used to float. The consumer was given a face value on the bond, and they knew that the bond, if held for the full maturity, would be worth at least the face value. That tradition continues today.

In reality it doesn't make a difference for your situation. A $50 dollar face value bond will be worth $50 after 20 years. A $25 dollar e-bond will be worth $50 after 20 years.

For simplicities sake, you will get 3.5% on however much money you give them, regardless of the value that the bond says on it.

 

[crystal]

If I remember correctly, let say you buy a $50 EE bond @ $25 today and it will matures in 20 yrs. Every year this bond will gain interest and after a certain amount of time, they will make a one time adjustment if the interest you gained will not give you $50 at maturity time. But let say bond interests are high and you got $50 after 10 years, if you don't cash it out, the bond will continue to gain interest and only stop at maturity date.

 

[dquan97]

wow...I remember getting a bunch of EE bonds a few years ago when CC were allowed to be used to buy them.