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Author: Worldleader31 Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35387  
Subject: Young - I Bonds and TIPS debate Date: 7/31/2003 3:36 PM
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I am a young investor, 19 years old, and want to start a small bond portfolio using inflation protected treasury bonds. I would like to make small monthly contributions, around $50 to begin building a portfolio.

I know that I can buy I bonds from the Treasury department in $50 incremements. I can also sell them if need be without a problem. Right now, this seems like the way to go.

My question is this, I am very new to the bond market/idea but I have been investing for years. I am looking for any suggestions or advice on whether I bonds are the way to go or if I should look more seriously at TIPS. Here are a few of my questions:

-If I buy I bonds from the Treasury will I incur any brokerage/acquisition fees?
-I fall into the 28% tax bracket, I don't believe that tax consequences are anything to worry about, are there any pitfalls I don't forsee?
-I doubt it, but is it possible to use I bonds as collateral in the future?
-What maturity periods should I be expecting when setting up an I bond portfolio? When it matures does the Treasury just send me a check for the face value?

THANKS! I really appreciate any help you can give me in answering some of my questions. The Treasury depts. website is a little confusing in places.
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Author: foobar73 Big red star, 1000 posts Feste Award Nominee! Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 8064 of 35387
Subject: Re: Young - I Bonds and TIPS debate Date: 7/31/2003 3:49 PM
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-If I buy I bonds from the Treasury will I incur any brokerage/acquisition fees?

No, there are no charges for purchasing I-bonds.

-I fall into the 28% tax bracket, I don't believe that tax consequences are anything to worry about, are there any pitfalls I don't forsee?

Probably not. I-bonds are meant to be simple to invest in, and have few tax wrinkles.

-I doubt it, but is it possible to use I bonds as collateral in the future?

No. I-bonds are non-transferrable, and can only be cashed by the original owner. As such, nobody will accept I-bonds as collateral for a loan, as they could not access it in case of default.

-What maturity periods should I be expecting when setting up an I bond portfolio? When it matures does the Treasury just send me a check for the face value?

I-bonds only come in 30-year maturities, but you can cash them in at any time after the initial 1 year holding period (with 3 month interest penalty if cashed before 5 years). It is up to you to cash them in yourself: the Treasury will not remind you about this.

Keep in mind that TIPS are only sold in increments of $1000 (par value). If you are only investing $50 at a time, you will have to use I-bonds instead.

www.savingsbonds.gov has much more to say about I-bonds, and you can find links there to TreasuryDirect, where TIPS are sold.

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Author: brewer12345 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 8065 of 35387
Subject: Re: Young - I Bonds and TIPS debate Date: 7/31/2003 4:06 PM
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If you have your heart set on TIPS, I believe that Vanguard has a TIPS fund that is pretty cheap. I don't know what the minimum investment and increments would be, though.

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Author: pekinrobin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 8068 of 35387
Subject: Re: Young - I Bonds and TIPS debate Date: 7/31/2003 5:15 PM
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You do not pay a fee to buy I bonds. You can actually be paid to buy I bonds. Here is how. Use this website:

https://wwws.publicdebt.treas.gov/SD/SBDHome?PROC=SBDHome&button.x=64&button.y=11

Pay with your Discover card. The Treasury Dept. will put your I bonds as a merchandise purchase -- you can choose with denomination with whose picture you want -- and Discover will pay your usual rebate on this purchase. This program expires soon but I just did this in June so I hope it's still available.

Get paid to invest...the way it should be.



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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: 8069 of 35387
Subject: Re: Young - I Bonds and TIPS debate Date: 7/31/2003 5:23 PM
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We've discussed this many times, but the evidence is that EE bonds will do better over the long term than I-bonds with a fixed rate for I-bonds of less than about 2.25%. This is based on past history, but it is a long history, with many ups and downs of markets and interest rates.

With only small amounts of money to invest, you really have to go with Savings bonds, not treasuries, or with a bond fund (with risk of a falling NAV). At your age, you have plenty of time for the tax advantage of buying EE bonds (or I bonds if the fixed rate is more attractive) at increments to beat buying CDs at increments.

In the short run, I bonds look like a better deal than EE bonds; but they are not inteded for short term uses.

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Author: Worldleader31 Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 8070 of 35387
Subject: Re: Young - I Bonds and TIPS debate Date: 7/31/2003 6:41 PM
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Thanks for all the help! I think that I bonds are the way to go for my circumstance.

How long does it take to cash them in after you mail them to the Treasury Dept?

THANKS!

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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: 8071 of 35387
Subject: Re: Young - I Bonds and TIPS debate Date: 8/1/2003 12:17 AM
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How long does it take to cash them in after you mail them to the Treasury Dept?

It takes only a few days by ACH if you are using Treasury Direct website to get your money.

I'm not sure about what Lok said about the returns on I Bonds vs EE but the I Bond I bought are paying 4 something percent and the next six months will be paying over 5% blowing away EE Bonds at the moment. Seems like a good idea to buy both. Very easy to buy, 30K with the click of a mouse.

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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: 8073 of 35387
Subject: Re: Young - I Bonds and TIPS debate Date: 8/1/2003 8:01 AM
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I'm not sure about what Lok said about the returns on I Bonds vs EE but the I Bond I bought are paying 4 something percent and the next six months will be paying over 5% blowing away EE Bonds at the moment. Seems like a good idea to buy both. Very easy to buy, 30K with the click of a mouse.

I'm talking long term. US Savings Bonds are intended as long term investments for those with small amounts of money to invest at a crack. Over the next year, maybe even the next few years, I bonds may do better, given the head start, but unless we get into a long, unique period, EE bonds should blow away I-bonds with a 1.1% fixed rate long before the time frame for getting the tax deferred bonus for US Savings bonds kicks in.

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Author: benhancockjr Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 8074 of 35387
Subject: Re: Young - I Bonds and TIPS debate Date: 8/1/2003 9:38 AM
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I'm just curious about the data demonstrating that over the long haul EE bonds will beat I-bonds if the fixed portion of the i-bond is below something like 2.25% (i can't remember what the precise number is).

doesn't this assume that you would continue to hold the i-bond instead of flipping it when the fixed portion of the interest rate goes up enough to offset the penalty you would pay for holding less than 5 years.

Ben

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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: 8075 of 35387
Subject: Re: Young - I Bonds and TIPS debate Date: 8/1/2003 9:50 AM
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Sonnet,

the I Bond I bought are paying 4 something percent and the next six months will be paying over 5%

Can you go into further details why you think the I Bonds you just bought will be paying over 5% during the next 6-month period? According to my calculations, they're more likely to pay 0% than > 5%.

Ken

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Author: splotto Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 8076 of 35387
Subject: Re: Young - I Bonds and TIPS debate Date: 8/1/2003 9:52 AM
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Ken:

The I bonds I bought in Jan. & Feb. are at 5.17% according to Savings Bond Wizard.

Splotto



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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: 8077 of 35387
Subject: Re: Young - I Bonds and TIPS debate Date: 8/1/2003 9:57 AM
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Hi, Splotto,

The I bonds I bought in Jan. & Feb. are at 5.17% according to Savings Bond Wizard.

That's true, but Sonnet's message seemed to be talking about the current I Bonds paying 1.1% fixed ("the I Bond I bought are paying 4 something percent"). It sounded like he believes those will be paying over 5% during the next 6-month period.

Maybe I mis-interpreted what he wrote.

Ken

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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: 8078 of 35387
Subject: Re: Young - I Bonds and TIPS debate Date: 8/1/2003 10:20 AM
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"I'm just curious about the data demonstrating that over the long haul EE bonds will beat I-bonds if the fixed portion of the i-bond is below something like 2.25% (i can't remember what the precise number is).

doesn't this assume that you would continue to hold the i-bond instead of flipping it when the fixed portion of the interest rate goes up enough to offset the penalty you would pay for holding less than 5 years."

Ben,

The research assumes holding to maturity. I suppose it would be possible to play around and find some opportunity to switch when I-bonds start doing worse. But don't forget you not only would lose some interest if you cash in within 5 years, you'd pay federal taxes on all you'd earned, when you switch. When all is said and done, the amount of money that can be made by playing switcheroo, in real $$$, would be neglible.

I'll say again that if people spent as much time trimming fat from their budgets (or using their time to make a sandwich instead of going out to lunch), they'd be a lot better off than finding schemes to squeeze a smidgen more out of their returns on investment.


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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: 8088 of 35387
Subject: Re: Young - I Bonds and TIPS debate Date: 8/1/2003 3:03 PM
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Can you go into further details why you think the I Bonds you just bought will be paying over 5% during the next 6-month period? According to my calculations, they're more likely to pay 0% than > 5%.

I started the I Bond account April 30th, right before the adjustment. So I got the higher fixed rate and the higher inflation adjustment not to mention all of April's interest.

SONNET


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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: 8089 of 35387
Subject: Re: Young - I Bonds and TIPS debate Date: 8/1/2003 4:15 PM
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Thanks, Sonnet, for the clarification -- I had misinterpreted what you wrote. As Splotto pointed out, you are 100% correct. Those Bonds are currently earning 4.08%, and will bump up to 5.17% during the next 6-month period. The 6-month period after that will be the really poor one (but you'll still be 0.50% better off than those who bought the next day).

Ken

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