Savings bonds were first created to finance World War 1. Originally called liberty bonds, they are now sold as series EE and Series I savings bonds. Financial institutions stopped selling paper based savings bonds on January 1st, 2012.
Series EE bonds reach maturity after 20 years from the date of issue. They are usually liquidated at twice the face value and make for great investment vehicles. They can however continue to earn interest for a total of 30 years. The interest on Series EE bonds is calculated monthly and is paid when the holder cashes the bond. For bonds that were issued before May 2005, the rate of interest is usually computed after six months and is calculated at 90% of the average 5 year treasury yield set from the preceding six months.
For bonds that were issued after May 2005, pay a fixed interest rate of 0.20%, based on the life of the bond. At the rate of .20%, a bond that costs $100 at face value would be worth $105 just before 20 years and would be adjusted to $200 at exactly 20 years, giving it an effective rate of 3.5%. The bond would then continue to earn the fixed interest rate for another 10 years after maturity.
Within 10 years, the interest rate for new bonds in 2009 dropped by over 5% to settle at 0.7% for new bonds.
EE paper bonds were issued with a face value of double their purchase price. A $100 bond could be bought for $50 but would be worth $100 at maturity.
Series I Bonds
On the other hand, Series I binds have a variable interest rate that is based on the rate of inflation. Series I binds have a variable yield based on Inflation and is based on two components. The first is usually a fixed rate that remains constant during the lifetime of the bond. The second part of the bond is usually reset every six months through the lifetime of the bond to take into account the current inflation rate.
The new rates are usually published very 1st of May and 1st of November of every year. The fixed rate which is usually determined by the Treasury department remains at 0% from 1st of November 2012. The variable interest rate for the Series I bonds is usually calculated based on the consumer price index or CPU-I.