With all the recent hoopla over the stock market, I recently gave a young couple getting married an I bond. Why? Because everything they wanted in their registry was already bought, and a check, to me, is rather impersonal. Also, the I bond was returning a nice five percent return, risk free. Certainly better than taking a loss on stocks and even getting only one percent in a bank savings account. Really, who even bothers with that today? Even a money-market fund was returning a scant two percent, so five percent sounded rather good.
What the lovely couple got was a safe, government-guaranteed, inflation-indexed U.S. Savings Bond.
For those in the know, the best deal this Spring has been on the I bonds. They are probably better than EE bonds, which are sometimes called Patriot bonds. In fact, that batch of I bonds back in April was paying a tidy 4.08 percent.
With both types of bonds, the interest rate, or yield, changes semi-annually following the date of purchase. EE bonds, remember, adjust to yield some 90 percent of the average rate paid during a prior six month period by five-year Treasury bonds. By the end of April, they paid 3.25 percent.
In case you're wondering, I bond yields are reflected either by a fixed rate that remains intact for the life of the bond or a variable rate that moves up or down semi-annually based on the inflation rate. Since last November, the fixed rate has been 1.6 percent while the variable comes in at 2.46 percent. So, if you bother to round the adjustment built into the formula, you get the 4.08 percent.
New I Bonds that came out in May pay 4.65 to 4.98 percent.
Of course, if you intend to hold bonds for more than five years, you might consider EE even though they don't pay as much over the short haul. Why? Because EEs yield about 2.2 percentage points more than the inflation rate. However, it still takes quite a few years for any EE bond that is issued at today's rather low rates to surpass the I bond which is really a better deal for those who want a one- to five-year investment.
But keep certain things in mind before you leap into bonds. For one, your money is not yours for at least 12 months. You can't redeem it until you've owned it for a year and if you redeem a savings bond within the first five years, then you relinquish the final three months of interest payments. Savings bonds then are really not a wise investment for people who need to be financially fluid inasmuch as the interest is not received until the bond matures or you redeem it. Also, for high rollers, an individual can only put up to $30,000 into savings bonds a year; a couple $60,000.
And one final thought. The U.S. government guarantees that you will receive all that you paid for the bond plus compounded interest. Better than the stock market, eh?
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