What Is E-bond?
The E-bond, officially known as the Series E United States Savings bond, was a type of non-marketable government securities issued by the U.S. Treasury that offered a secure, low-risk fixed-income investment to the public. Introduced to help finance government needs, particularly during wartime, these bonds were sold at a discount from their face value and matured to their full value over a specified period, earning interest through compounding. The E-bond was a foundational instrument in popularizing government debt among individual investors.
History and Origin
The first savings bonds, Series A, were introduced in 1935 during the Great Depression to encourage public saving and provide a source of government financing. The E-bond specifically was launched on May 1, 1941, initially referred to as "Defense Bonds." President Franklin D. Roosevelt himself purchased the first E-bond from Treasury Secretary Henry Morgenthau Jr.7. Following the attack on Pearl Harbor in December 1941, these bonds quickly became known as war bonds, playing a critical role in financing the colossal expenses of World War II.
The sale of war bonds, including the E-bond, was a massive public campaign, engaging millions of Americans and raising billions of dollars. This effort not only funded the war but also helped manage inflation by absorbing excess consumer spending at a time when goods were scarce6. After the war, the E-bond continued to be a popular retail investment, remaining available to the public until June 1980, when it was replaced by the Series EE bond. The last issued Series E bonds ceased earning interest in 2010.
Key Takeaways
- The E-bond was a type of U.S. savings bond issued at a discount to its face value, accumulating interest over time.
- It played a crucial role as "war bonds" during World War II, helping to finance the war effort and control inflation.
- E-bonds were non-marketable, meaning they could not be traded on secondary markets.
- They were replaced by Series EE bonds in 1980, and all E-bonds have since stopped earning interest.
- Interest earned on E-bonds was subject to federal income tax, though exempt from state and local income taxes.
Formula and Calculation
The E-bond did not have a "formula" in the sense of a variable calculation; rather, its interest accrual was based on a fixed rate guaranteed for its maturity period. The bonds were sold at a discount (e.g., a $25 bond cost $18.75) and gradually increased in value until they reached their full face value at maturity. For bonds issued between 1941 and November 1965, interest accrued for 40 years, while those issued from December 1965 to June 1980 accrued interest for 30 years. The interest was compounded semiannually, meaning earned interest was added to the principal to earn further interest.
Interpreting the E-bond
The primary interpretation of an E-bond was its value at any given time relative to its purchase price, reflecting the accrued interest. Investors would refer to redemption tables, often provided by the U.S. Treasury, to determine the current value of their bond. The longer an E-bond was held, the closer its value approached, and eventually exceeded, its face value due to compounding interest. These bonds were generally seen as a long-term, safe means of saving, rather than a speculative investment for short-term gains.
Hypothetical Example
Imagine an individual purchased a $100 Series E bond in 1970 for $75. This bond had a stated maturity of 30 years, implying it would reach its full face value by 2000. Each six months, the bond would earn a fixed rate of interest, which was then added to its growing value. If the holder decided to redeem the bond in 1990, the redemption value would be greater than the initial $75 purchase price but less than the $100 face value, reflecting 20 years of accrued interest. The full $100 face value would only be realized at its maturity in 2000, and it would continue to earn interest for an additional period after that before ceasing to accrue interest in 2010.
Practical Applications
Historically, the E-bond served several practical purposes. Its primary application was as a reliable, secure savings vehicle for individual Americans, often promoting financial discipline through payroll deduction plans. During World War II, the E-bond was instrumental in patriotic war bonds drives, directly funding the war effort and helping to stabilize the economy by curbing inflation5. For the U.S. government, E-bonds represented a significant, consistent source of borrowing, contributing to the broader management of the national debt https://www.stlouisfed.org/publications/regional-economist/fourth-quarter-2016/the-us-public-debt-then-and-now. The design of the E-bond, with its discount issuance and guaranteed growth, made it accessible and attractive to a wide range of investors, fostering widespread participation in government securities.
Limitations and Criticisms
While highly successful in its time, the E-bond had certain limitations. As a non-marketable security, it could not be sold on a secondary market, which limited liquidity for investors who needed to access their funds before maturity. Investors could only redeem the bond through the U.S. Treasury or authorized financial institutions, and there was typically a penalty if redeemed too early (e.g., loss of the last three months' interest if cashed before five years). Another limitation was their fixed rate of return, which, while offering stability, meant they did not adjust for changes in market interest rates or inflation after issuance. This fixed rate could make them less attractive during periods of rising interest rates or high inflation compared to alternative investments.
E-bond vs. Series EE bond
The E-bond and the Series EE bond are closely related, with the latter directly succeeding the former. The E-bond was the original U.S. savings bond that gained widespread popularity, particularly during World War II. It was discontinued in June 1980.
The Series EE bond, introduced in 1980, effectively replaced the E-bond and serves a similar purpose as a secure, long-term savings bond issued by the U.S. Treasury. Like the E-bond, Series EE bonds are non-marketable. Modern EE bonds, primarily available through TreasuryDirect, are generally purchased at face value rather than at a discount, with interest accruing monthly and compounding semiannually4. They are guaranteed to at least double in value over 20 years and continue earning interest for up to 30 years3. Confusion can arise because both represent long-term government savings instruments, but the E-bond is a historical series, while the EE bond is its contemporary equivalent.
FAQs
How long did E-bonds earn interest?
E-bonds earned interest for a specific period, typically 30 or 40 years, depending on their issue date. After this period, they ceased to accrue any further interest.
Are E-bonds still redeemable?
Yes, unredeemed E-bonds can still be cashed in at their current value, including all accrued interest, even if they have stopped earning interest. The U.S. Treasury (through TreasuryDirect) or financial institutions can help determine the bond's value and facilitate redemption.
Was interest on E-bonds taxable?
The interest earned on E-bonds was subject to federal income tax. However, it was exempt from state and local income taxes2. Investors generally had the option to defer reporting the interest until the bond matured or was redeemed1.
What replaced the E-bond?
The E-bond was replaced by the Series EE bond in June 1980. The Series EE bond continues to be a popular fixed-income product offered by the U.S. Treasury today.