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URL:  https://boards.fool.com/ltlti-bonds-are-quotd-bondsquot-as-well-16004156.aspx

Subject:  Re: Interesting article on deflation Date:  10/28/2001  1:49 AM
Author:  markr33 Number:  54192 of 883101

<<I-bonds are "D-bonds" as well. They have a 3% minimum yield which is better than any Money Market or government bond would give you under [severe] deflation.>>

If you are talking real return, yes.

If you are talking nominal return, No! According to http://www.publicdebt.treas.gov/sav/sbifaq.htm "Frequently Asked Questions about I Bonds", the rate can be zero. Specifically,

5. Can I ever lose money in I Bonds?

No. I Bonds are U.S. Treasury securities backed by the U.S. Government. I Bonds even protect you from the effects of deflation. 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.

Since this is directly from the Bureau of the Public Debt, the issuers of I-Bonds, I would tend to think that they know what they are talking about when it comes to I-Bonds.


So what do they mean when they refer to the 3% guaranteed base return ?

An very simplified example -

Bought $1000 bond in year 1 - inflation is 2% in year 2, 2% in year 3,
-2% in year 4, and -2% in year 5, and 2% in year 6.

Year 1 - $1000
Year 2 - $1000 * (1 + .03 + .02) or 1050
Year 3 - $1050 * (1 + .03 + .02) or 1102.50
Year 4 - $1102.50 * (1 + .03 + ?? should be 0) or 1135.58
Year 5 - $1135.58 * (1 + .03 + ?? should be 0) or 1169.64
Year 6 - $1169.64 * (1 + .03 + .02) or 1228.12

The question is, do they collect the cumulative deflation and apply it against the future inflation, or do they discount the deflation to 0 ?

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