What it means
Most savings bonds grow quietly and pay out everything at the end. The Series HH bond worked the other way: it was bought at face value and then paid a fixed amount of interest every six months, so the holder had a steady income stream.
That made it popular with retirees who wanted regular cash without selling anything. In its later years, a Series HH bond could not be bought with fresh cash.
It was issued only in exchange for matured Series E or EE bonds, or for matured Series H bonds, which let holders defer the tax on the accumulated interest of the older bonds. The Treasury stopped issuing the bond in 2004.
The interest rate was fixed for each bond according to its issue date, so two HH bonds of the same face value could pay quite different amounts. Interest was paid by electronic transfer into the owner's bank account, and the bond itself kept its original face value throughout.
When a bond reached its final maturity, the interest stopped and the face value was paid out. From a financial reporting point of view, an HH bond is simple to handle.
It sits as a financial asset at its face value, the interest is recorded as income when received or accrued, and there is no gain or loss to track because the redemption value never moves. Interest was subject to federal income tax in the year it was paid, but exempt from state and local income tax.
The nuance that causes confusion is the difference between income bonds and accrual bonds. An HH bond is an income bond (it pays out as it goes), while Series EE and I bonds are accrual bonds (they grow and pay at the end).
Choosing between the two types is a question of when the holder wants cash and when the holder wants to pay tax.
In practice
Real-world examples.
Example
A retired teacher exchanged matured savings bonds for HH bonds so she could defer tax on the old interest. She now receives two small deposits a year into her bank account, and her accountant reports the interest on her annual tax return.
Example
A family trust holds HH bonds as a low-risk income asset inside a portfolio. The trustee records each half-yearly deposit as interest income and notes the final maturity date in the asset register so reinvestment can be planned.
Example
A personal finance writer contrasts HH bonds with inflation-linked bonds in a magazine feature. She shows that a fixed income stream loses purchasing power over a long term, which is a risk that the fixed HH rate did not protect against.
Formula
Calculation
Semi-annual interest payment = face value x annual rate / 2
Annual income = face value x annual rate
Suppose a retiree holds Series HH bonds with a total face value of $20,000, and the fixed rate on these bonds is 4% a year. The annual income is 20,000 x 0.04 = $800. Each half-yearly payment is 800 / 2 = $400. Because the redemption value never changes, at final maturity the retiree receives the original $20,000 back, so over a full 20-year term the total interest received is 800 x 20 = $16,000.Case study
Seen in the real world.
Brightwater Advisory is an illustrative, fictional planning firm. One of its clients, a widow in her seventies, held HH bonds with a combined face value of $50,000 and no clear idea of when they would stop paying.
The adviser checked each bond's issue date and found that two of them, with a combined face value of $20,000 and a 4% fixed rate, were approaching final maturity within 18 months. Once those two matured, the client's yearly income would fall by $800, so the adviser built a plan to reinvest the returned $20,000 before the payments stopped.
The illustrative moral is that a bond with a fixed end date has a cliff built into it. Knowing the maturity schedule well in advance gave the client time to replace the income instead of discovering the gap after the final payment arrived.
Watch out
Common mistakes.
- Assuming that an HH bond grows in value over time, when its redemption value stays at the original face amount.
- Forgetting that interest stops at final maturity, so income planned around the bond disappears on a known date.
- Treating the interest as tax-free because it is paid by the government, when it is generally taxable at the federal level.
Questions
People also ask.
Can you buy Series HH bonds today?
No, the Treasury stopped issuing them in 2004, so only existing bonds remain.
How often does an HH bond pay interest?
It pays twice a year, and the money is sent by direct deposit to the owner's bank account.
What is the difference between an HH bond and an EE bond?
An HH bond pays out interest regularly and keeps its face value, while an EE bond accumulates interest inside its redemption value and pays it all at the end.
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