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These Savings Bonds Aren't Kids' Stuff

When their certificates of deposit mature, savers have some unappealing choices: either roll over the CDs at 4% or put the money into stocks, bonds, or mutual funds--where the principal is at risk. The situation is particularly worrisome for savers who live off interest income. They need all the yield they can get but can't afford to take risks.

Here's a prescription for CD shock that you're not likely to hear from a broker or banker: U.S. savings bonds. No, not the kind that people give as gifts for newlyweds and newborns--persons in need of long-term savings but not current income. Those are the Series EE sort, which are bought at half their face value and mature in 12 years to full value.

The lesser-known Series HH bonds make attractive vehicles for savers who want regular interest payments. They're purchased at face value and make semiannual payments of 6% a year. The interest is sent by electronic funds transfer directly to the bondholder's bank account. And unlike bank interest, income from savings bonds is exempt from state and local taxes.

The bonds have a 10-year life and can be extended for another 10 years. They are issued in denominations of $500, $1,000, $5,000, and $10,000. Unlike Series EE bonds, which pay out a variable rate of interest, the rate on Series HH bonds doesn't change. However, if interest rates jump, you can cash in these bonds without penalty or loss of principal and look for higher returns elsewhere.

Series HH are available through Federal Reserve Banks and their branches. You can purchase them only with Series EE bonds.

If you have a maturing CD and no EE bonds, there's still a way to get HHs. Frank Riley, the Treasury's New York district director for U.S. Savings Bonds, says savers can purchase, say, $10,000 in EE bonds (that's $20,000 face value) and convert them to $10,000 in HH bonds six months from now--the minimum amount of time EEs must be held. The saver will only earn a 4.16% annual interest rate for the six-month period, but that's no worse than what's available at many banks and thrifts.

The only limitation to this savings program is that an individual must restrict purchases of EE bonds to $15,000 ($30,000 face value) per year. Couples can invest $15,000 each. There is, however, no limit on the EE holdings you can exchange for Series HH bonds.

CURRENT
      LOW-RISK YIELDS
      U.S. TREASURY
      NOTE (5-YEAR)        6.4%
      SERIES HH
      SAVINGS BOND         6.0
      MONEY-MARKET
      MUTUAL FUND          4.1*
      BANK CERTIFICATE
      OF DEPOSIT (1-YEAR)  4.1*
      U.S. TREASURY
      BILL (6-MONTH)       4.0
      *Average
      DATA: BW
      
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