FOOL’S SCHOOL Savings Bonds 101

If you’re looking for safe, slow growth, consider U.S. savings bonds, which are backed by Uncle Sam. Some even offer inflation-adjusted returns! In a nutshell:

Series EE Bonds: These have replaced the Series E bonds. Their interest rate as of 2005 is fixed, and it was recently 3.4 percent. The bonds pay interest for up to 30 years, and you can buy up to $30,000 worth of the bonds per year, either electronically or on paper.

Series HH Bonds: These bonds have been phased out, so you might not be able to get your hands on them anymore.

I Bonds: The “I” stands for “inflation,” because the return on an I Bond is a combination of a fixed rate (established at the time of purchase) and a floating rate that is adjusted every six months based on the Consumer Price Index for urban users (CPI-U). You can buy up to $30,000 worth per year.

Treasury Inflation-Protected Securities (TIPS): These are Treasurys, not savings bonds. But people buy TIPS for the same reasons they buy I Bonds -- inflation protection and safety. The interest rate on TIPS stays the same, but the principal is adjusted to keep up with inflation. Better still, the interest is based on the pumped-up principal, so not only has the value of your investment increased, but you’ll also receive more interest.

Though there are many differences among the aforementioned investments, they have some favorable characteristics in common: They’re issued by the U.S. government, so they’re pretty safe. They’re exempt from state and local taxes. (EE and I Bonds have the additional tax advantages of tax-deferral and can be tax-free if used for qualified higher-education expenses.) They can be purchased commission-free at www.treasurydirect.gov and sometimes also at your local bank or other financial institution.

For info and rates on CDs and money market accounts, drop by www.fool.com/savings/ savings. htm.

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