UnThreaded | Threaded | Whole Thread (24) | Ignore Thread Prev Thread | Prev | Next | Next Thread
Author: KenAtPcs Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35400  
Subject: Re: Inflation Numbers Date: 1/19/2006 12:16 AM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 1
Is it true that an I-bond can never go down per 6 month period, or is it overall from the date of purchase?

Here's what the FAQ-in-progress states:
----Although it has not yet happened, it is possible the CPI-U will be negative (deflation) for a 6-month period. In this case, the composite rate (i.e., the interest rate earned) will become less than the I-Bond's fixed rate. However, the composite rate can never be less than 0% and subtract from your previous earnings.

So, assuming that's correct (and as we'll see in a moment, it seems to be), the answer is: can never go down per 6 month period.

If one has older I-bonds that have earned X%, then a certain 6 month period has a -2% variable component and a 1% fixed component. Does the bond have total earnings of X% at that point or X-1%?

X% (again, assuming the first answer above is correct).

If the I-bond is redeemed at that point, does it receive X% or X-1%?

X% again.

If the I-bond is still within the 5 year window, which 3 months of earnings are forfeited, is it the last 3 months (of 0%, or effectively no forfeit at all), or some other 3 month period?

I just noticed that the FAQ-in-progress doesn't mention that, but the naswer is as you suspected -- it is the last 3 months of interest that are lost. As you stated, effectively no forfeit at all.

Of course, wouldn't it be interesting if the government decided to take their statement literally, claiming that since the I Bond didn't earn ANY interest during its last 6 months, it has to take the interest earned in months 4-6 as the penalty! That would be ... %^#$%!#$

I think I have heard that TIPS calculate the "deflation" case differently. How is it calculated for TIPS? Can a negative yield actually be accumulated?

Back to the beginning question. The FAQ-in-progress points to a post which contains an example of how deflation would affect both I Bonds & TIPS:
http://boards.fool.com/Message.asp?mid=17918368

That's where my original answer that I Bonds won't ever lose their value is supported (quoted from somewhere on the TD site):
In the rare event that the CPI-U is negative during a period of deflation and the decline in the CPI-U is greater than the fixed rate, the redemption value of your I-Bonds will remain the same until the earnings rate becomes greater than zero.

As for TIPS, the short answer is, yes, a negative yield can be accumulated. Ouch.

And finally, does anyone believe that inflation will remain at -2% for this period even with gasoline prices on the rise again? Does CPI-U even include energy?

I can't answer for everyone of course, but personally I don't believe the final inflation adjustment will be -2%. Yes, the CPI-U does include a healthy energy component (gas, electricity, home heating, and I forget what else). That in large part was what caused the huge spike that led to the current inflation adustment of almost 5.75%.

However, I believe the inflation adjustment will be very small, and I'd say it's a 50-50 change (at best) that it will be a positive number at all.

Ken
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Print the post  
UnThreaded | Threaded | Whole Thread (24) | Ignore Thread Prev Thread | Prev | Next | Next Thread

Announcements

Foolanthropy 2014!
By working with young, first-time moms, Nurse-Family Partnership is able to truly change lives – for generations to come.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Post of the Day:
Macro Economics

Looking at Currency Ratios
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and "#1 Media Company to Work For" (BusinessInsider 2011)! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement