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I just copied down the rates for I-bonds and EE bonds since I-bonds were started, and thought others might want the information in one place. It will be interesting to see if I-bond fixed rates ever go back up above 3% during a normal interest rate cycle: sure looks like they will win over EE bonds most years at 3% or above. (Hope this comes out as a table, since it didn't with cut and paste.)

Date I Fixed Rate I Inflation Rate I-Bond Total EE Bond
11/98 3.4 1.72 5.12 4.6
5/99 3.3 1.72 5.02 4.31
11/99 3.4 3.52 6.92 5.19
5/00 3.6 3.82 7.42 5.73
11/00 3.4 3.04 6.44 5.54
5/01 3.0 2.88 5.88 4.5
11/01 2.0 2.38 4.38 4.07
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Looks like I-Bonds beat EE-Bonds all the time! At least thats what your table sez. Dunno of any advantage EE-Bonds have over I-Bonds. Can anyone mention any??? Am thinking about savings bonds as a 2nd tier (or complementary portion) of my emergency fund.

Yeah, and your presentation did not come out as a table. Ive tried in the past and never got it to work out. I've given up trying to format.

Mark in MD
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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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EE bonds are a fixed rate...for the length of the bond.

Actually, EE-bonds adjust their rates every 6 months, similar to I-bonds. However, the rate is not indexed to CPI, but rather the yield of ordinary Treasuries.
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This is an atempt to repost your table with

< p r e >

before the table and

< / p r e >

after the table (no spaces between characters, but I had to do something so the codes would show up).

Date I Fixed Rate I Inflation Rate I-Bond Total EE Bond
----- ------------ ---------------- ------------ -------
11/98 3.4 1.72 5.12 4.6
5/99 3.3 1.72 5.02 4.31
11/99 3.4 3.52 6.92 5.19
5/00 3.6 3.82 7.42 5.73
11/00 3.4 3.04 6.44 5.54
5/01 3.0 2.88 5.88 4.5
11/01 2.0 2.38 4.38 4.07
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Thanks Mark,

That looks a whole lot better!

And I've also learned, tonight, that bankers aren't in it for the laughs.
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In an effort to get the coffee flowing through my brain (flows through other parts fast enough), I decided to try a calculation, using the table Mark kindly made readable, comparing I-bond and EE returns, using current rates as a starting point and the past 3 years as a model for the next 3. (That is, using current rates for the first 6 months, I then went back to Nov '98 and subsequent rates through May 2001).

Assuming I did the arithmetic right (bad asumption), after 3.5 years, a $1000 I-bond with an underlying 2% rate with inflation adjustments as the were from Nov '98-May '01 would be worth $1177.53, while an EE bond, starting with today's 4.07% with Nov. '98-May '01 rates thereafter, would be worth $1182.50.

The underperformance of the I-bond is because the first two inflation adjustments left it below EE-bond rates for those 6-month periods, so even though, subsequently, I-bond inflation adjustments put the total rate over that of EE-bonds for most 6-months periods, the net result (due to compounding) was less.

Since, it seems a fair assumption that the next inflation adjustment for I-bonds, and probably Nov. '02 as well, will be low (I no longer think there will actually be deflation) that suggests, at least if you're planning on holding onto the bond for some time, that right now an EE bond is a better choice.

I remember someone said they had seen some research showing that I-bonds with 2% fixed rate were likely to underperform EE-bonds while with 3% fixed rate they were likely to outperform. Makes sense.
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EE bonds are a fixed rate...for the length of the bond.

No, they're not.

EE bonds grow at a variable rate based on intermediate-term treasuries.

If you hold until the "initial maturity" you're guaranteed that the bond will have doubled in value by then.
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Sorry....my bad :)
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