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Author: TMFKGOMalley Big gold star, 5000 posts Old School Fool Motley Fool One Everlasting Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35357  
Subject: Re: I bonds vs. bank deposits Date: 7/26/2001 8:58 AM
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Am I wrong assuming that $1,000 in both 5.92% interest bond and 5.92% APY hypothetical money market account will become $1,059.20 after a year (before the 3 month bond interest penalty is applied, of course)?

Why cannot these interests be compared, then?

And even more importantly, if the 5.92% bond interest is not the same as 5.92% CD or money market account, how can I adjust either of them, so that they become comparable?



Hi,


Forgive me if I'm not understanding your question, but don't I Bonds have a variable component (as well as a fixed component)?


www.publicdebt.treas.gov/sav/sbifaq.htm#sbifaq1
"The earnings rate of an I Bond is a combination of two separate rates: a fixed rate of return and a variable semiannual inflation rate. The fixed rate remains the same throughout the life of the I Bond, while the semiannual inflation rate can vary every six months.

The fixed rate of return is announced by the Treasury Department each May and November. The fixed rate of return announced in May of a given year is the same over the entire life of the I Bonds you purchase between May 1 and October 31 of that year. Likewise, the fixed rate of return announced in November of a given year applies to the entire life of I Bonds you purchase between November 1 and April 30 of the following year.

The semiannual inflation rate is also announced each May and November by the Treasury Department. The semiannual inflation rate is based on changes in the Consumer Price Index for all Urban consumers (CPI-U), which is reported by the Bureau of Labor Statistics. The semiannual inflation rate announced in May is a measure of inflation over the preceding October through March; the inflation rate announced in November is a measure of inflation over the preceding April through September.

The semiannual inflation rate is combined with the fixed rate of an I Bond to determine the I Bond's earnings rate for the next six months."


Since the rate can change every six months, you can't have a fixed APY for the bond. You do know the underlying rate and you can guesstimate the inflation component however.

I hope this helps.


Keith O'Malley
TMF KGOMalley
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