How Much Are These EE Bonds Worth?

Also, is there any difference between interest and principal Treasury STRIPS?
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My father has EE bonds (are they Treasury bonds?) that I guess by now have mostly matured. He has just taken ill, and I'm trying to figure out his finances for him. If I choose to leave these bonds alone and not collect on them, what happens to them? Would they just sit there as uncollected cash, or is there an expiration date for cashing them out? -- Donna Pham

Donna,

Your dad owns Series EE savings bonds, a species of Treasury bonds that can be bought or redeemed through most banks. (Soon, the government

says, they'll also be available online.) There is no market for savings bonds, meaning they are not traded the way other Treasury securities are. (The Treasury classifies its outstanding debt as marketable or nonmarketable; savings bonds are one of the nonmarketable types.)

I'll tell you all I think you need to know, but for more information, consult the Treasury's excellent

Bureau of the Public Debt

Web site. It has an entire

section on savings bonds that should answer any remaining questions you have.

There are three main types of savings bonds: the Series EE (the most popular, with about $121 billion outstanding), the Series HH (about $12 billion outstanding) and the Series I (about $398 million outstanding).

The basic differences are as follows: Series EE bonds are similar to zero-coupon bonds; they're issued at a 50% discount to face value and accrue interest rather than paying it. You get the interest payments when you cash the bond. Series HH bonds are similar to regular bonds; they're issued at face value and pay interest every six months. (The only way to get them is in exchange for EE bonds.) Series I (that's a letter, not a roman numeral) bonds sell at face value, but they accrue interest at a rate that is indexed to inflation as measured by the

Consumer Price Index

.

EE and I bonds come in denominations of $50, $75, $100, $200, $500, $1,000, $5,000 and $10,000. HH bonds have four denominations: $500, $1,000, $5,000 and $10,000.

The situation with your dad's EE bonds depends on when he bought them. The bonds can be redeemed starting six months after they were purchased. If he redeems them within the first five years of purchase, he'll forfeit three months' worth of interest. (He'll receive what the bond was worth three months prior to when he redeems it.)

EE bonds are guaranteed to reach their face value in 17 years, but they will continue to earn interest for up to 30 years, meaning that they can be worth significantly more than face value at redemption.

Fortunately for your dad, EE bonds are still young enough -- issuance of EE bonds started in 1980 -- that none has stopped paying interest yet. The rate they earn depends on when they were issued. Consult the savings bond section of the Bureau of the Public Debt site for details.

To find out what the bonds are worth, use this

calculator from the

New York Fed

. The Bureau of the Public Debt site will let you download its Savings Bond Wizard, which does the same thing with more bells and whistles. You can save your dad's entire portfolio as a file so you can go back and check its total value from time to time.

A final word on the subject. If your dad wants to transfer ownership of the bonds to you (or to anyone else), meaning that he no longer wants to be listed as owner or co-owner of them, he'll have to pay tax on the interest earned until the date of transfer. That's assuming he hasn't been paying it all along. (EE bondholders can pay tax on the accrued interest each year, or defer until the bonds are cashed.) If he transfers ownership of the bonds, make sure you keep a record of his payment of the tax. When the bond is finally cashed, the 1099 form the new owner will receive will show the total amount of interest from the original issue date. He or she will have to show that tax was already paid on a portion of it.

Principal vs. Interest STRIPS

Should I care whether Treasury zeros I buy are stripped principal or stripped interest? -- Peter Kobak

Peter,

No, you should not.

Investors who want to buy Treasury zero-coupon bonds can choose principal STRIPS or interest STRIPS. Here's how it works: The Treasury issues only standard, coupon-bearing bonds. Since 1985, dealers have been able to create zero-coupon bonds out of them by separating them into their component parts.

A standard bond is simply a series of coupon payments and a principal repayment coinciding with the final coupon payment. A zero-coupon bond, by contrast, pays only principal at maturity. It is priced at a discount to compensate the investor for forgoing coupon income.

Dealers create zero-coupon bonds out of standard bonds by selling each coupon payment and principal repayment in the series as a separate security. The program under which they do this is called Separate Trading of Registered Interest and Principal Securities, or STRIPS, and the process of separating a standard bond into its component parts is called stripping.

As required by the Treasury (which has loads more info on STRIPS on its Bureau of the Public Debt

Web site), dealers start with a sufficiently large par amount of standard bonds so that each component payment has a value of $1,000 or a multiple of $1,000.

Obviously, because interest payments outnumber principal payments in a bond, coupon strips outnumber principal strips. But there's no reason -- trading, tax or other -- to prefer one over the other. "The functionality is all the same," says

Charles Schwab

fixed-income head John Ladensack.

TSC Fixed-Income Forum aims to provide general bond information. Under no circumstances does the information in this column represent a recommendation to buy or sell bonds, funds or other securities.