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Thread: I bonds

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    Default I bonds

    Anyone have an opinion on them? I'm thinking of investing a small sum . Not looking for huge returns, just want to diversify and have some investments that will be guaranteed to keep place with inflation. Are I bonds the right choice?

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    Default Re: I bonds

    I am going to assume you are talking about savings bonds .....

    What many people dont realize is that not all savings bonds are created equal. Each bond has a different rate of return based on when they were issued.
    I have seen some savings bonds have a rate of return as high as 10%.

    The government actually has a really great website. It will help you find the rate of return for old bonds, calculators for dollar amounts at cash out date, and to shop for the best savings bond for you. It also lists the different rate of returns and when there is a rate special.

    http://www.treasurydirect.gov/

    Hope this helps and good luck with your investments.
    Nature knows no indecencies; man invents them. ~ Mark Twain


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    Default Re: I bonds

    I bonds are a new series of US savings bonds. They have a nominal 5 year term, and the interest rate paid is partly fixed but partly tied to the ( future ) CPI-U index. Present composite interest rate paid is 1.94%. I bonds also carry a de-facto 'early withdrawl penalty' if not held to maturity. I bond interest payments are NOT exempt from federal income tax ( although exempt from state and local income tax ). I bonds can be purchased directly from the US treasury without the need for a stock / bond brokerage account.

    For a prospective buyer who lives in a state with no income tax, there isn't any tax reduction 'value' to I bonds. As such, a straight up comparison of a 1.94% I bond, versus a plain vanilla 5 year CD paying 2.25%, would appear to be a 'loser'. Yes the I bond interest rate will adjust in the future, but it is gov't CPI based thus is likely to fall below the actual rate of inflation ( thanks to hedonic adjustments, substitutions etc. applied to the gov't's official CPI calculation ).

    In terms of other options, a US treasury bond based ETF with similar 5 year term target ... like IEI or SCHR ... offers a de-facto variable interest rate ( as older bonds in the portfolio are replaced by newer bonds ), and also offers returns in the same ballpark as the 5 year bank CD ( if not higher ... SCHR is at 2.93% YTD ). However, in the extreme case of a total financial meltdown, US treasury bond based ETF's or mutual funds could experience capital losses which the CD's or Series I savings bonds or actual treasury bonds / notes would not ( if held to maturity ).

    If you can spare the larger ~$5,000 sum of cash, you can also purchase an actual US 5 year treasury note via a broker. These notes are the 'safest' of any of the above options, and at present provide about a 1.6% return.

    Personally speaking, if you're looking to diversify risk, and looking for a 'stable' investment that will actually keep pace with US dollar inflation in the long term, you might want to consider buying physical gold ! IMHO one of the most important diversification objectives these days is having investments which are NOT exclusively US dollar denominated !!! But that's just a dumb blonde with big boobs talking ...
    Last edited by Melonie; 08-13-2014 at 11:04 AM.

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