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U.S. Government securities can be divided into those that can be
traded and those that cannot. The bonds that can be traded are called marketable:
after they are bought, investors can sell them on the secondary market through
exchanges, or over the counter. The secondary market is very active, and bond
prices fluctuate with the prevailing interest rates.
The bonds that we have covered until now are marketable. There
are also non-marketable government securities. Only the federal government
can redeem these. They do not trade on secondary markets.
The three types of non-marketable bonds are called Series EE, Series
HH, and Series I bonds.
Series EE bonds are the savings bonds that have been popular
for decades. They do not distribute interest periodically, as many other bonds
do. They are purchased at a discount from the face value (par). The discount
is calculated using the bond's interest rate and years to maturity. Investors
purchase them for less than their face value and let them build up to full face
value at maturity.
The minimum face value of a Series EE bond is $50. The maximum
face value possible is $30,000. One can purchase Series EE bonds at banks or
through payroll deduction plans. The investor can allow the accrued interest
to be taxed each year, or he or she can defer it until the bond is redeemed.
Tax may even be deferred beyond this date if the investor exchanges his or her
bond for a Series HH bond.
Series HH bonds are savings bonds that do pay interest and
are sold at their face values. Interest is paid twice per year. The denominations
range from $500 to $10,000. Series HH bonds may be redeemed after six months.
They normally mature in ten years but can be extended to twenty. Series HH bonds
can only be obtained as exchanges of Series E or Series EE bonds. They come
with fixed rates of interest. These are no longer available as of August 2004.
Series I bonds also are sold at their full face value, beginning
with a minimum denomination of $50. Other denominations are $75, $100, $200,
$500, $1,000, $5,000, and $10,000. Like Series EE bonds, you receive the interest
earned when you cash the bond; however, you must hold EE and I bonds at least
six months (12 months if purchased in February 2003 or after). I bonds earn
interest for 30 years.
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