Bond returns are expressed in two different ways -- the rate and the yield. While a rate tells you how much interest a bond pays, the yield also takes into account pricing fluctuations and compounding and includes them. Series EE savings bonds are somewhat unique in the way that they are positioned and sold. Their rates and yields are more similar than they would be on other bonds.
Bond Interest Rates
Most bonds pay interest either periodically or when they are cashed in. That interest rate is sometimes called a face rate or a coupon rate. If you buy a $10,000 bond with a 0.2 percent interest rate, you will earn $20 per year, every year, until the bond matures or you cash it in. That rate remains the same regardless of how you buy the bond. Series EE savings bonds offer a special additional one-time interest payout, which can also impact the overall interest rate.
The interest on some bonds, including Series EE savings bonds, is compounded. The issuer pays interest on the bond's value and on any already accrued. If you buy a $10,000 Series EE bond with a 0.2 percent interest rate, you'll have $10,010 at the end of the first six months. For the second half of the year, the $10,010 balance earns interest, and you'll have $10,020.01 at the end of the year.
Series EE bonds' prices don't fluctuate. The Treasury sells them directly to the recipient, with some allowance for gifting, and once you have a bond, you can't sell it. Without fluctuations, your yield doesn't float much. Your bond's interest compounds only once every six months. This leads to a very small spread between your interest rate and your yield after compounding.
While, as of the date of publication, Series EE savings bonds pay a relatively low 0.20 percent fixed interest rate, they have a provision that may make holding them for the long term attractive. The Treasury guarantees that the bond will double in value over a 20-year period. If, based on the interest rate they pay, the value doesn't double, the Treasury makes a deposit into your account for the difference. This gives the bonds an effective yield of approximately 3.5 percent per year if held for the full 20-year term. After the bonus, they continue to grow for 10 more years at their fixed interest rate.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.