2

I have a 30-year U.S. treasury bond (series EE) that is about 3 years away from maturity. I'm considering cashing it in. However, the purchase value was half the face value. If I cash it in, would I be missing out on this increase in value? Or do they determine fair value based on how close it is to maturity (in addition to the accrued interest)?

3

Your bond's current value reflects interest that has accumulated since the issue date. See, e.g., rates and terms for your bond on the Treasury Direct website. Also on that website, there is a calculator for determining the current value. Note that, per the first link:

Treasury guarantees that an EE Bond will be worth at least its face value when it reaches its original maturity date.

If, for some reason, the current value is much less than the face value, it may be worth waiting until the maturity date to take advantage of that guarantee. (I don't know whether or not such a discrepancy is possible in practice.)

In summary, you purchased the bond for some purchase price less than the face value. Over time, before the the maturity, the bond gains value beyond the purchase price due to interest. At the maturity date, the value will reflect either:

  • the original purchase price, plus interest, or
  • the face value,

whichever is higher. If you cash out before the maturity date, you get the original purchase price plus interest.

  • I checked on that website previously and it shows the issue price plus interest. Am I to understand the interest also includes some component of the increase between purchase price to face value as well as coupon payments? – Craig W Nov 16 '15 at 15:55
  • 2
    @CraigW The entire increase in value beyond what you paid for it is interest. If you bought a $50 bond for $25, it's like you put $25 in a bank account and are now earning interest (at least as far as interest goes, there are other differences). When you sell the bond, it's like you're taking all the money out of the account. Everything above $25 is interest, and in fact, you'll get a 1099-INT when you redeem the bond (or early the next year), showing the difference between what you get at redemption and the purchase price as interest. – blm Nov 16 '15 at 17:46
  • @CraigW I added an additional paragraph which hopefully addresses your comment. – Mike Haskel Nov 16 '15 at 18:38
  • 1
    Since the interest rate is fixed, isn't it obvious when the bond is purchased whether the value at maturity will be face value or higher? – Craig W Nov 16 '15 at 18:51
  • 2
    @CraigW US Bonds are complicated now. They don't have a fixed rate of interest. Rather, there's a variable rate of interest, but they guarantee that it will double in value in 20 years. So if the variable interest doesn't result in doubling in 20 years -- equivalent to a fixed rate of about 3.5% -- they'll jump the value to double. – Jay Nov 16 '15 at 21:47

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.