U.S. Savings Bonds are the original zero-coupon bonds. Buy them at a deep discount from their face value and, upon maturity, the government will pay you the full face amount.

In 1982, Congress raised the minimum return on Series EE bonds, linking it to that of five-year Treasury securities. Now new Series EE bonds earn 90 percent of the average yield on five-year Treasury notes during the preceding six months. Another advantage is that EE bonds are not subject to state and local taxes. Additionally federal taxes are deferred until the money is actually withdrawn.

If you are saving for college tuition, EE bonds can be particularly attractive because with certain limitations, interest on the proceeds from EE bonds used to pay for college tuition may be free of all federal income taxes.

An important differences between EE bonds and zero-coupon bonds. Investors in a regular zero-coupon bond must pay taxes on the imputed interest, even though its not actually paid to the investor until the bond matures.

EE bonds are sold in denominations as low as $50, making them very attractive for first-time investors and as gifts. Denomination amounts go up to $10,000.