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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: of 35400  
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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