Getting a bang from bonds: savings bonds - from zeros to EES - stand to offer great, safe rewards.

Novice investors are often driven to fixed-income securities - namely bonds - because they're cheaper than stocks and help to counter low inflation. Bonds also offer another level of comfort: With their fixed rates of return, they're likely to grow your money at a steadier rate than, say, stocks or mutual funds.

Unfortunately, many folks play the bond game by trial and error, often ignoring the fact that bond yields are tied to changing interest rates. Thus, the lower the rate, the smaller the return on your investment For instance, last February, the Treasury Department lowered the guaranteed minimum interest rate on savings bonds - one of the best savings deals left. Series EE and HH savings bonds dipped from 6% to 4%.

While the short-term prospects for bonds may not look too bright, there's definitely light at the end of the tunnel. Interest rates will probably lag for another two years. But by 1995, says Vernon J. Brown, certified financial planner and principal of V. Brown & Co. Inc. in White Plains, N.Y., "Interest rates will move upward." Our advice: Avoid locking in your money short-term at today's rates. But if you're thinking long-term or simply can't stand to waft for rates to go up, hedge your bets by investing in bonds with scattered maturities, say from two to 10 years. Perhaps the safest bonds are those that are backed by the government: Treasuries, Zero Coupon bonds and U.S. savings bonds.

Treasury Bonds And Notes

The biggest advantage of Treasuries is government protection. It's unlikely the government will default on its obligation. Or it will seize the opportunity created by failing interest rates to refund your principal prematurely and reborrow the money at a lower cost, as is possible with corporate bonds.

You can buy notes and bonds in minimun denominations of $1,000. However, the maturity on Treasury bonds is a flat 10 years, compared with maturities of up to 10 years for notes. Treasury bonds are sold through brokers but usually for commissions lower than stock purchases (i.e., 1% vs. 3%).

Interest earned is free from state and local taxes, and Treasury bonds pay interest income twice a year. The current rate is 6%. Of course, you risk the loss of your principal if you sell Treasuries before maturity.

Zero Coupon Bonds

If you are looking for a higher rate of return, then consider Zero Coupon Treasury bonds. "At a rate of about 7.5%, the return on Zero Coupon Treasury STRIPS (Separate Trading of Registered Interest and Principal Securities) makes them a competitive alternative to other low-yielding fixed-income investments, especially savings bonds," says Gail Perry-Mason, a financial adviser at Prudential Securities Inc. in Detroit.

Zero Coupon Treasury STRIPS, Mason says, can be timed to meet individual investor's needs, and are particularly smart for conservative retirement savers: Ranging in rates from roughly 6% to 8.5%, they are sold at 100 different maturities for up to 30 years.

Zeros are sold through brokers (typically for about a 1% commission charge) and represent ownership of future interest or principal payments, normally on U.S. Treasury bonds. The government is obligated to pay the interest and principal in full when the bond reaches maturity.

Zero Coupon Treasury STRIPS are sold at a discount or at face value and in denominations as small as $30. For $692, a potential investor could purchase a Zero Coupon Treasury STRIP with a face value of $1,000, yielding 7.5% and maturing in 5 years (see chart for more examples). A clear advantage of adding Zero Coupon Treasury STRIPS to your financial holdings is that you don't have to reinvest the interest, says Pierre Dunagan, account executive at Dean Witter Reynolds in Matteson, III. The interest compounds automatically until the bond reaches final maturity.

What happens if interest rates decline during the life of Zeros? Nothing. The market value and yield of these securities change only if they are sold before maturity. Should you need to sell your Zero Coupon bond prior to maturity, the interest rates at the time will dictate how much you get back. If rates rise, you stand to receive less than you paid for the bond. But if they fall, you stand to get back more than you put out.

A downside of Zeros is that they are not tax-free. Earnings are subject to taxes yearly even though you don't receive a dime.

Savings Bonds

Uncle Sam may have pulled the rug out from under savings bonds in February by lowering rates two full percentage points. Still, in spite of these lower yields, U.S. Savings Bonds are worth looking at. For starters, they are one of the few potential federal tax-break investments left for those saving for college.

Parents can escape any federal income tax on bonds redeemed for college expenses if their gross income - including interest earned on the bonds - doesn't exceed $60,250. The cap is $45,500 for single parents. The tax exemption phases out completely at $98,250 for couples and $60,500 for single parents.

But Congress is looking to do away with income requirements. Should this come to pass, savings bonds will be even more attractive alternatives for financing a college education. Without income limitations, Series EE bonds would be tax-free as long as they are used for college expenses.

In general, savings bonds are exempt from state and local taxes. Investors put off paying federal taxes until the bond is redeemed, allowing owners to reap the benefits of compounded tax-deferred interest.

Another benefit of savings bonds is convenience. You can purchase Series EE Savings Bonds directly at banks and credit unions (the smallest denomination is $50; you pay half the face value). Some people opt to have money taken out of their paychecks to buy savings bonds through company-sponsored programs.

Bear in mind that in addition to dropping the minimum rate, the Treasury Department changed the formula for savings bonds held less than five years. Bonds issued before March 1, 1993, earn graduated rates of 4.16% for 6 months, 4.78% for 2 1/2 years and at least 6% (retroactive) after five years. New bonds bought after March 1, earn at least 4% if held five years. (To find out about the present redemption values of saving bonds, write to the U.S. Savings Bond Division, Department of the Treasury, 800 K Street NW, Suite 800, Washington, DC 20226.)

The rate won't get any lower than 4%, thanks to the Stark Amendment of 1976, which set this minimum rate. And on bonds issued before March, the Treasury tacks on interest for 30 months running. From then on, interest is added semiannually.

Whatever savings vehicle you use, just make sure you carefully weigh interest rates, safety and length of time.

B.E. STOCK TIP

American consumers are big fans of athletic wear. And this love affair has helped Russell Corp. in Alexander City, Ala., boost earnings by 44.2% in 1992. The company's 1991 licensing deal with Major League Baseball is paying off, sales increased 11.2% in 1992. Russell is also benefiting from heavy advertising and spiffier in-store display. And it continues to sell at discount to the overall market. Recent price: $39. It trades on the New York Stock Exchange.

STOCK WATCH

Blue-chip stocks have always been mainstays in any savvy investor's portfolio. But as the song goes, some blue chips are bluer than blue. Geraldine Weiss, editor of the La Jolla, Calif.-based Investment Quality Trends newsletter (24 issues/year; $275; 619-459-3818) recently singled out 64 "royal blue-chip" stocks. What makes them stately? Each boosted their cash dividends at least 11 times over the past dozen years at a rate of 10% or more. In addition, they boast low debt levels, less than 20% of total capitalization. Here are a few of her picks that are household names: General Electric (14%), Heinz (7%), Jostens (14%) and Walgreen (10%).

MUTUAL FUND UPDATE

Mutual funds holding small capitalization stocks (companies valued between 50 million and $1 billion) peaked in 1983 and then stayed in the doldrums for eight years. In 1991 mutual funds specializing in small company growth stocks outpaced large company stocks and scored a 51.62% gain versus 30.4% for the Standard & Poor's 500 stock index. As a group, these funds were up 12.6% last year.

According to Summit, N.J., Lipper Analytical Services Inc., the top 10 small-cap stock funds for the first quarter were: * Regis ICM Small Company Fund, 9.87%. * Robertson Stephens: Value Plus Fund, 9.62%. * Mutual: Discovery Fund, 9.20%. * Pacific Financial Asset Management Co.: Small Cap Growth Fund, 9.11%. * Dreyfus-Wilshire: Small Co. Value Fund, 9.06%. * The Regis: FMA Small Co. Fund, 8.09%. * US Boston: Small Cap, 8.08%. * Quest Value: Small Cap, 7.84%. * Acorn Fund, 7.72%. * Zweig Sr Tr: Appreciation Fund, 7.52%.

SPEND AND

SAVE?

A new program from START Inc. in Herndon, Va., entices folks to spend till they drop, all in the name of retirement savings. The purported reward of such frivolity? A handsome $100,000 at age 65 for big spenders. Is such a program worth it? Probably not, but read on and decide for yourself.

The START (Spend Today and Retire Tomorrow) program is a hybrid credit card and annuity product. START members receive a 1% to 7% "credit" for charging items on a their participating MasterCard or Visa. The rebates are funneled quarterly into a tax-deferred annuity, currently earning 5.5%, from Metropolitan Life Insurance Co. of New York.

If you began charging at age 35, you'd have to ring up an average of $19,800 in START purchases per year to reap the $100,000 reward by retirement. And annual interest charges, up to 20%, don't help you ratchet up credits. If that's not enough to turn you off, consider this: On your own, $122 invested monthly at 5% interest would build a $100,0000 nest egg in 30 years.

ADJUSTABLE-RATE

MORTGAGES

With mortgage interest rates at a 20-year low, many people don't want to pass up the chance to buy their dream homes. But they are confused by the different types of mortgages. To help home buyers make sound decisions, the Council of Better Business Bureaus Inc.,

Arlington, Va., has put out a free pamphlet, Tips On ... Adjustable Rate Mortgages. Call 703-247-9310.

KIDDIE IRAs

As a parent, you may think opening an individual retirement account (IRA) for your child is a bit peculiar. But it's cost-effective if your teen is making money. Whether your child makes money baby-sitting or working as a department store cashier, you can put his or her earnings into an IRA.

You're never too young to save for those golden years. Let's say you contribute $2,000 annually for 10 years, starting when your child is 15. The money would grow to $650,000 by your child's 65th birthday (assuming an 8% rate of return). But the same 10-year contribution, starting at age 35, would add up to only $150,000 after 30 years.

Parents may make annual gifts of $2,000 to their child's account, and they're tax-deductible. Up to $3,600 is sheltered from federal taxes.