Having read the Fool information about the purchase of a bond, I decided the thing for me is an I-bond as a place for money instead of a savings account. BUT, I am somewhat puzzled, having decided to purchase on the internet, by the disclaimer that even if parked in an I-Bond for say, 1 year, there appeared something to the effect that a penalty will be incurred if the bond is sold before 5 years. Can anyone explain this?
Hi, RAM11!You may get more responses in the "Bonds" board:http://boards.fool.com/Messages.asp?bid=100135For Retirement questions, ask on the "Retirement Investing" board:http://boards.fool.com/Messages.asp?bid=100154A US Savings Bond pays interest according to a set formula. The formula is always the same but some of the parameters in the formula may differ. For Series E/EE bonds, the interest rate is based on the rates on Treasury securities; for series I bonds the interest rate is based on the inflation rate. [Series H/HH bonds are different beasts in that they throw off income regularly and have a completely fixed rate.]However, to cover the cost of accepting the money, issuing the bond, etc. the government charges a 3 month interest penalty. For instance if you cash it in after 1 year, you only get 9 months worth of interest. If you cash it in after 4 years and 3 months, you only get 4 years worth of interest.Once you get to 5 years the penalty disappears.There are some credit card tricks you can use to counteract the 3 month penalty.
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