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TREASURY IMPROVING BOND RETURN : MONEY MATTERS.

Byline: David Skidmore Associated Press

The government is improving the return on U.S. savings bonds in hopes of enticing more Americans to buy the venerable securities.

More than 55 million Americans collectively own $186 billion in savings bonds, commonly available through banks and payroll savings plans. With the smallest denomination of a Series EE bond selling for just $25, they've been a popular savings vehicle for children's college education or as holiday and birthday gifts for young relatives.

But they've had trouble competing with mutual funds during the stock market boom of recent years and sales have declined from $17.5 billion in fiscal 1993 to $6 billion last year.

So the government made changes, effective for bonds purchased today and after. They will improve the bonds' yield during the first five years after purchase between 1 and 1-1/2 percentage points a year, said Daniel J. Pederson, author of ``U.S. Savings Bonds: A Comprehensive Guide.''

For example, a bond purchased last November has yielded 4.56 percent on an annual basis. If the new rules had been in effect, the owner would have received 5.85 percent, Pederson said.

After five years, the improvement amounts to about a quarter of a percentage point.

Savers who have purchased their securities since the last rule change in May 1995 may want to consider cashing in their bonds and buying new bonds with the improved return, he said.

One caveat: Cashing in the old bonds means income tax may be due on any accrued interest. Most savers probably will want to keep bonds purchased before May 1995, he said.

For the past two years, the Treasury Department has had a two-tier system. For the first five years after purchase, a holder of a Series EE bond would be paid 85 percent of the average market rate on six-month Treasury bills. After that, the bonds would earn 85 percent of the rate on five-year Treasury notes.

Under the new, simpler system, all new bonds will earn 90 percent of the five-year note average. Terms on already-purchased bonds remain unchanged.

Moreover, interest will accrue monthly instead of every six months. Pederson estimated Americans have been losing more than $100 million by cashing in bonds just before the interest is due.

Under the new system, a three-month interest penalty will be assessed on bonds redeemed less than five years after purchase. But at least a bond holder won't lose six months' interest with a badly timed redemption.

At a news conference Wednesday, Treasury Secretary Robert Rubin said the savings bond improvements are part of a broader effort by the Clinton administration to improve the nation's dismal 4.2 percent savings rate, the lowest among major industrialized countries.
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Title Annotation:BUSINESS
Publication:Daily News (Los Angeles, CA)
Date:May 1, 1997
Words:454
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