What it means
The Series E bond was created to help fund the war effort and to give ordinary households a safe, small-denomination place to save. It was sold at 75% of face value, so a bond with a $100 face value cost $75 on the day of purchase.
The government promised to pay the full $100 at maturity, and the difference was the investor's interest. Unlike a normal bond, a savings bond did not pay a regular coupon (a fixed interest payment made at set dates).
All of the interest was built into the rising redemption value and collected only when the holder cashed the bond in. That made it a simple product for people who had never owned a security before.
The Treasury stopped selling Series E bonds in 1980 and replaced them with Series EE bonds. Many Series E bonds were allowed to keep earning interest beyond their original maturity through extension periods, but each bond eventually reached a final maturity after which it stopped earning anything.
A bond that has passed its final maturity is, in effect, a dormant asset. For a finance professional, the practical issues are valuation and tax.
The redemption value of an old bond depends on its issue date and denomination, and the government publishes tools for working it out. Interest has generally been taxable at the federal level when the bond is cashed in or reaches final maturity, unless the holder chose to report it each year.
The nuance is that a Series E bond is not a bond in the corporate sense. It cannot be traded on a market, it can only be redeemed with the government, and it is registered to named owners.
Ownership questions after a death, or for lost bonds, are handled through a replacement and claims process rather than a sale.
In practice
Real-world examples.
Example
An executor sorting through a late grandfather's papers finds a stack of paper Series E bonds. She looks up the issue date and denomination of each one, works out the redemption value and adds the total to the estate inventory as a financial asset.
Example
A small accounting practice is asked by a client to explain why a savings bond from decades ago has stopped growing. The accountant checks the issue date, confirms the bond passed its final maturity, and advises the client to cash it in because holding on earns nothing further.
Example
A university finance lecturer uses the Series E bond to teach discount instruments. Students compare its single payment at maturity with a coupon bond and with a modern zero-coupon bond, and calculate the implied yearly return from the discount.
Formula
Calculation
Total return on a discount bond = (face value - purchase price) / purchase price
Annualised return = (face value / purchase price) ^ (1 / years held) - 1
Suppose a family bought a Series E bond with a $1,000 face value for $750 and held it for 10 years until it reached its face value. The total gain is 1,000 - 750 = $250. The total return is 250 / 750 = 33.3%. Spread over 10 years with compounding, the annualised return is (1,000 / 750) ^ (1 / 10) - 1, which is about 2.9% a year. Simple averaging would give 33.3% / 10 = 3.3%, which overstates the true yearly rate because it ignores compounding.Case study
Seen in the real world.
Harlow & Finch Estate Services is an illustrative, fictional firm that helps families wind up the affairs of elderly relatives. A client brought in 14 old savings bonds found in a tin, with no records of what they were worth.
The firm's analyst sorted the bonds by issue date and denomination, and found that most had long passed their final maturity. Three had been issued early enough that their values were far lower than the family expected, while the rest still had meaningful redemption values that had stopped growing years earlier.
The illustrative lesson is that an old bond is a time-sensitive asset only until it reaches final maturity. After that, delay costs nothing in lost interest, but it does leave value idle, and the family was advised to redeem promptly and report the interest for tax purposes.
Watch out
Common mistakes.
- Assuming a Series E bond is still earning interest decades after it was issued, when most have passed their final maturity and stopped growing.
- Reading the printed face value as what the bond is worth today, when the redemption value depends on the issue date and the interest accrued.
- Treating a savings bond as something that can be sold on a market to another investor, when it can only be redeemed with the issuer.
Questions
People also ask.
Can you still buy a Series E bond?
No, the Treasury replaced the series with Series EE bonds in 1980, so only the old paper bonds remain.
Is the interest on a Series E bond taxable?
Interest has generally been taxable at the federal level, either when the bond is cashed in or when it reaches final maturity, unless the owner elected to report it yearly.
What happens if a Series E bond is lost or destroyed?
The owner can usually apply to the Treasury for a replacement or for payment, providing details such as the serial number, issue date and owner's name.
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