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Author: Edorsch One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35392  
Subject: Bonds on interest free credit? Date: 5/9/2000 2:39 PM
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My first post to the Bond board...

Here's a copy of my last post to the Living Below Your Means board. We're discussing investing on borrowed capital at low interest rates.

***Question for you bond experts:
If I buy an I-bond at face value, what's the risk that I won't be able to sell it back at face value + interest, if I don't wait until it fully matures? I'm planning on selling after six months.

Here's the plan...

Amex offers a 0% introductory rate for 6 months. No annual fees. After that, the APR goes up to 9.9%, which still beats my current US Bank Visa, which is paid off and there just for emergencies. I must qualify this by saying we are VERY LBYM with credit cards, and pay them off!!!

But this seems like a great deal...

The government currently offers I-bonds (bonds with an interest rate adjusted for inflation) at an annual rate of 7.49%, compounded twice annually. At www.savingsbonds.gov, you can purchase them in denominations ranging from $50 up -- ON YOUR CREDIT CARD -- so there's no hassle with getting a check or cash advance. And no fees for brokers, etc.

It seems to me, as long as I could make that monthly payment to the credit card, I'm using interest free capital to make 7.49% interest for 6 months. Not too shabby. Then I pay off the card, get rid of my old VISA, and keep the new one for the same reason (for safety and for my credit rating). No harm. No foul. Much gain.

At a new homeowners workshop, the instructors told us that it's best for a married couple to have 3 credit cards for their credit rating. As I understand it, it actually helps to have a balance and pay it off. The critical thing is to make those monthlies. So, our neglected credit card could probably use some activity in the eyes of the credit bureaus!

Possible pitfalls?

1) In that sixth month, the credit card company might start charging the full interest rate before I can cash in the bond, meaning I'll have to pay the periodic rate for one month.

2) No one will buy the bonds at full price before maturity? This is one thing I'm going to research. As I understand it, you just take them to the bank and sell them at face value plus accrued interest.

These risks seem negligible, but I'll have to do some number crunching.

But if I had that zero interest student loan, I'd sure put as much into bonds as I could. YOU CANNOT LOSE THE PRINCIPAL, according to the government--though your gains are variable.

Just think: $10,000 at 7.49% compounded once at 6 months would be a gain of $374.50. Assuming I have to pay Amex the period rate for that last month of lag time, that's a loss of $75. My net? $299.50 in six months! And that's exempt from income tax. Just for some paperwork and making those monthly payments (which I get back when I cash from the bond, anyway).

I MUST be missing something here...it's too good to be true.

Mr. Ed
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