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Author: qingchang Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35392  
Subject: Question on EE bond/I bond rate change Date: 10/6/2003 3:15 PM
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Hi,

In the recent Money magzine, an article suggests purchasing EE bond because the purchase at October will lock 4.66% for six months. I was confused. I thought if I purchase today, I can earn 4.66% in October, then after Nov 1st, I start to earn with the new rate.

Am I right?

Thanks,
Qing
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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 8625 of 35392
Subject: Re: Question on EE bond/I bond rate change Date: 10/6/2003 6:46 PM
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"In the recent Money magzine, an article suggests purchasing EE bond because the purchase at October will lock 4.66% for six months. I was confused. I thought if I purchase today, I can earn 4.66% in October, then after Nov 1st, I start to earn with the new rate."

Qing,

You are definitely confused. First of all, they must be talking about I-bonds not EE bonds. The current rate on I bonds is 4.66%, EE bonds 2.66%. The I-bond has a 1.1% "fixed rate" component for the life of the bond, with the current inflation adjustment accounting for the rest. The inflation adjustment for the next 6 months will be much less (somewhere closer to 1% than the current 3.56%)—the last inflation adjustment was artificially high, mostly because of a spike in oil prices in anticipation of the Iraq invasion.

When you buy a US Savings bond, either I bond or EE bond, you get the rate at which you purchase the bond for 6 months, then you get the next rate for 6 months, and so on. They announce the next rate on Novemebr 1 and May 1, but if you bought an I-bond today, you would get 4.6% interest until April 6, 2004, at which time you would get the new rate (the one announced November 1) from April 6, 2004 until October 6, 2004. And so on.

If you are looking for somewhere to park money for a short time, buying an I-bond with current interest rate, then cashing it in somewhere after a year (even though you pay a 3 month interest rate penalty), probably works. If you want to buy and I-bond, you are probably better off getting it now than in a month, because we don't expect the fixed rate to go up. But the current fixed rate component of an I-bond is very low.


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Author: LowMargin One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 8626 of 35392
Subject: Re: Question on EE bond/I bond rate change Date: 10/6/2003 7:43 PM
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Where and how do you buy I bond?

Thanks,

Fred

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Author: Sonnet Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 8627 of 35392
Subject: Re: Question on EE bond/I bond rate change Date: 10/6/2003 10:17 PM
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Where and how do you buy I bond?

https://www.treasurydirect.gov/fw/BPDLogin?application=rscreate

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Author: Mark0Young Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 8628 of 35392
Subject: Re: Question on EE bond/I bond rate change Date: 10/6/2003 11:48 PM
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Where and how do you buy I bond?

See http://www.publicdebt.treas.gov/sav/sbiinvst.htm at the section labeled "Buying."

Your choices are (generally):

1. "Book entry" (paperless) I-Bonds and EE-Bonds through Treasury Direct, using direct debit of your bank account to pay the purchase price of that Savings Bond. (Eventually this might be the only way to buy Savings Bonds.)

2. Paper savings bonds, using a credit card, can be purchased through Savings Bonds Direct. Since this is considered a "purchase" by one's credit card issuer, if one has some sort of a "rewards" card (cash back, airline miles, etc.), one will get that "reward" for purchasing Savings Bonds through Savings Bonds Direct. (Warning: if you go into a bank to purchase a savings bond using a credit card, it would be treated as a cash advance. The only place to have it treated as a "Purchase" is through Savings Bonds Direct.) Note: Savings Bonds Direct will be terminated at 3pm EST on December 30, 2003.

3. EasySaver: your bank account will be direct debited on a regular basis and a paper Savings Bond will be mailed. EasySaver will stop accepting new applications at the end of December of 2003 and the automatic purchasing of paper Savings Bonds will end sometime in 2005. (Reoccurring purchases can also be scheduled through Treasury Direct.)

4. Payroll Savings Plan: many employers allow a payroll deduction to fund the purchase of paper Savings Bonds. (Note: paper savings bonds will eventually be phased out. There hasn't been any announcement that I have seen about what would replace it, but it wouldn't surprise me if this morphs into feeding a Treasury Direct account.)

5. Through many financial institutions. Many banks and credit unions offer, as a courtesy to their customers, the purchase of (paper) Savings Bonds and, if one has an account there, funds in one or more of those accounts can be used for purchasing Savings Bonds. A few also allow reoccurring purchase of (paper) Savings Bonds.

My personal experience has been purchasing through my credit union, through Savings Bonds Direct, and through Treasury Direct.

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Author: markr33 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 8633 of 35392
Subject: Re: Question on EE bond/I bond rate change Date: 10/8/2003 12:23 PM
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If you want to buy and I-bond, you are probably better off getting it now than in a month, because we don't expect the fixed rate to go up. But the current fixed rate component of an I-bond is very low.

This is a very interesting statement. If the fixed rate doesn't go up and inflation declines to near zero for a few years, then essentially I-bonds are gone and very few people will buy them. So, assuming the issuer (treasury ?) is also thinking about this, they basically have a decision to "kill off" I-bonds or to increase the fixed rate somewhat.

What do y'all think ?


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Author: Foolferlove Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 8634 of 35392
Subject: Re: Question on EE bond/I bond rate change Date: 10/8/2003 12:54 PM
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So, assuming the issuer (treasury ?) is also thinking about this, they basically have a decision to "kill off" I-bonds or to increase the fixed rate somewhat.

Well, put another way, they won't "kill" I-bonds, it's just that unless they raise the fixed rate, the average investor will just buy EE-bonds instead or buy nothing UNTIL inflations comes back up, or the fixed rate goes back up in the future. So it's just a short-term thing that might make I-bonds unattractive.

On the other hand, if someone thinks that in the long term inflation will be huge, they may still purchase I-bonds at 1.1% fixed even with negative inflation in the short term. Because if inflation skyrockets, couldn't the fixed rate be set even LOWER than 1.1%?

In anycase, the short answer to your question is that the feds won't sell a lot of I-bonds when people go to the website and see that they are yielding 0%!

I would LOVE to see them increase the fixed rate by a couple of %age points, but I don't think it will happen. :(

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Author: markr33 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 8635 of 35392
Subject: Re: Question on EE bond/I bond rate change Date: 10/8/2003 1:06 PM
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I would LOVE to see them increase the fixed rate by a couple of %age points, but I don't think it will happen. :(

Even if they are considering raising the fixed rate somewhat (and I think it is less than a 50/50 chance that they are considering it), they would likely only raise it to something at or less than 2%. The Fed is signalling a relatively long-term bias towards lower rates.


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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 8636 of 35392
Subject: Re: Question on EE bond/I bond rate change Date: 10/8/2003 2:27 PM
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I wrote my earlier post hastily, and I think I meant to say we didn't expect the fixed rate to be raised by much, rather than not at all.

I would agree that people looking at the total return probably wouldn't find the current rate plus next inflation rate attractive.

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