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Subject:  Re: Interesting article on deflation Date:  10/28/2001  7:53 PM
Author:  markr33 Number:  54218 of 883311

The redemption value of an I-bond is determined by successively multiplying its face value by a composite rate that changes every six months.

This composite rate is essentially the sum of the bond's fixed rate plus the inflation rate for the period. Although the real composite rate could be negative during periods of high deflation, according to the Treasury will never set the composite rate below zero, thus preserving any earnings from previous periods.

To illustrate, suppose the real composite rates are 6.00%, 2.00%, -4.00%, and -8.00% during four successive six-month periods.

The oversimplified redemption value of a $1000 I-bond would then be $1000 x 1.03 x 1.01 x 1.00 x 1.00 = $1040.30.

Aha ... I see. So they weren't as good a deal as I thought. In any case, I don't expect any rampant deflation in the next decade or so. Seems to me that interest rates can only be lowered to about zero before they can only rise again.

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