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Subject:  Re: Short term investment I bonds or EE bonds Date:  1/14/2002  3:25 PM
Author:  foobar73 Number:  2766 of 36468

I'm trying to decide if I want to park my money short term in either I bonds or EE bonds. I'll probably be needing it in the second half of this year. I looked at corporate bond funds, but I think with the fees, I'll come out ahead just buying US securities. Plus, if I do decide to go back to school, then I may get some tax credit. Right now, it's just sitting in my checking accounts. I'm more used to stocks and money markets.

None of these options seems like the right thing to do. Savings bonds, both I and EE, cannot be cashed within six months of purchase, and cashing before five years entails a 3 month penalty of interest. If you're only holding on to your bonds for six months, you will only receive three months of interest, effectively halving your return. For I-bonds, this means a yield of about 2.2%. You can do better by buying a 6-month bank CD; you should be able to find rates above 3% easily. A good bank money market account will give you about the same.

The price of bond funds depend greatly on interest rates. Should interest rates rise for unforeseen reasons, bond fund prices will drop. The safety of bond funds lies in the ability of bonds to eventually recover their prices: if the fund price does drop, one is fairly sure the fund price will rise again, over time. The key is "over time": if you cash the fund out before its price recovers, you may not even get back your initial investment. Most bond funds are not acceptable short-term investment vehicles for this reason.

It seems best to stick with money market accounts, or CDs if you are so inclined.
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