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URL:  https://boards.fool.com/no-downside-to-ee-bonds-i-bonds-are-a-fixed-rate-16630031.aspx

Subject:  Re: I and EE Bond rates Date:  2/4/2002  9:02 AM
Author:  FoolishWarthog Number:  2942 of 36589

No downside to EE bonds.

I-bonds are a fixed rate plus inflation (or deflation). In theory (though I think it is rare historically), the economy could 'deflate'. Meaning the Consumer Price Index rate of inflation (which is what the I-bond is based on) becomes negative. For example, you have an I-bond with 3% base and the CPII at the time of purchase is 2%. So you effectively have an interest rate of 5%. Then in May, when the CPII is re-evaluated, it turns out to -1.5%. Now your I-Bond has an interest rate of 1.5%. It is possible to sit on an I-bond that is returning 0% for six months while an EE Bond is sitting at 4%. I Bonds are guaranteed to never go below 0, but it is possible to approach 0. EE bonds are a fixed rate...for the length of the bond.

Another advantage of EE bonds is that they can be converted to HH bonds. "Series HH bonds are current-income securities. This means that -- unlike the EE bond -- the HH bond itself doesn't increase in value. When an HH bond is issued, you pay the face amount ($500, $1,000, $5,000, or $10,000) for the bond and interest is paid each six months, providing you with “current income.” The interest payments on HH bonds are made by direct deposit to your checking or savings account at a financial institution. "

Basically, I-bonds are designed to protect your principle from being eaten away by inflation. EE-bonds are a long term, 'safe' saving vehicle, which can be turned in to income as HH bonds down the road.

I get both. Mainly because I have a credit card that pays 1% 'cash back' in the form of EE bonds. You're only allowed $500/year (actually $250 because EE bonds are sold at half of face value), but I figure it's an easy way to save. It will be our 'blow off money' in retirement :)

Learn more at:

http://www.savingsbonds.gov

-Warthog


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