EE bond effective annual yield?

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Cpadave
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EE bond effective annual yield?

Post by Cpadave » Sun May 24, 2020 9:32 am

Lets say I plan to buy a 20 years corporate bond to maturity. At what annual rate of return would it match the return from EE bond? I am at 22% fed rate and 5.5% state. I am trying to see the amount of benefit from deferral and state tax free vs regular bond? Thanks in advance.

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#Cruncher
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Re: EE bond effective annual yield?

Post by #Cruncher » Sun May 24, 2020 12:06 pm

Pretax an EE bond doubles in 20 years. If the federal tax rate at that time is 22%, each $1 EE bond will grow to $1.78 after tax ($2 less $0.22 tax on the $1 gain). This is an annual growth rate of 2.9250%.
2.9250% = 1.78 ^ (1 / 20) - 1

With a 22% federal and 5.5% state tax rate every year this corresponds to a pretax growth rate of 4.0345% for the corporate bond.
4.0345% = 2.9250% / (1 - 22% - 5.5%)

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Cpadave
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Re: EE bond effective annual yield?

Post by Cpadave » Sun May 24, 2020 12:19 pm

Thanks. So a 20 year corp bond tax I pay tax on income each year would need to be 4.03% coupon rate to give me the same return as the EE bond that would be income tax free on state and federal tax deferred for 20 years.

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anon_investor
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Re: EE bond effective annual yield?

Post by anon_investor » Sun May 24, 2020 12:32 pm

Cpadave wrote:
Sun May 24, 2020 12:19 pm
Thanks. So a 20 year corp bond tax I pay tax on income each year would need to be 4.03% coupon rate to give me the same return as the EE bond that would be income tax free on state and federal tax deferred for 20 years.
Don't forget the EE bond is risk free, the corporate bond is not.

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