Series I bond, what am I missing?

readytorock · #1 (**permalink**) 06-19-2008, 02:01 PM

I recently received a letter from my day job offering automatic deductions from my paycheck to purchase Series I Savings Bonds on a weekly basis.

They quoted an interest rate of 4.84%.

According to the letter the rates are locked in for 30 years when you buy a bond.

So..... what am I missing?

CD rates aren't that good. Online savings account rates aren't that good. Is this for real? Should I sign up next week for the payroll deduction and "pay myself first" with Series I Savings Bonds? Does the interest rate *really* lock in at 4.84% for 30 years?

LuxLiving · #2 (**permalink**) 06-19-2008, 02:07 PM

relevant link:
Site Map: US Savings Bonds

You also want to remember that any interest earned on these is taxable at the time you cash them in...

...which could lower the return depending on your tax rate at the time you cash them in.

cooliemae · #3 (**permalink**) 06-19-2008, 03:07 PM

Series I bonds have two components: a fixed base rate and a semiannual inflation rate.

Series I bonds are inflation adjusted, which means they will have the same purchasing power in the future as they do today.

You will not be able to touch the bonds for one year after you purchase them then a forfieture of the 3 months most recent interest before 5 years.

I would also suggest that you purchase your bonds through TreasuryDirect instead of a payroll deduction because you will have more control.

disneysteve · #4 (**permalink**) 06-19-2008, 03:32 PM

Quote:

Originally Posted by readytorock

Does the interest rate *really* lock in at 4.84% for 30 years?

Quote:

Originally Posted by cooliemae

Series I bonds have two components: a fixed base rate and a semiannual inflation rate.

cooliemae is correct. The overall rate is NOT locked in. What is locked in is the fixed base rate. The inflation component adjusts every 6 months in May and November I believe.

These can be very good deals. For example, about 5 years ago, I bought several I bonds ($25,000 worth to be exact). They have a fixed rate of 3.6%. The current inflation rate is 2.42%. So my bonds are currently earning 6.02%. Pretty darn good by current standards.

jIM_Ohio · #5 (**permalink**) 06-19-2008, 04:17 PM

If I could find a guaranteed return of 4.8% above inflation, I would use that for any after tax investments outside of an EF. I did not think I bonds were paying that well now.

disneysteve · #6 (**permalink**) 06-19-2008, 05:54 PM

Jim, bonds purchased today aren't paying that much because the fixed rate is lower. But mine have a fixed rate of 3.6% and now the inflation rate has risen making the overall rate quite good. I'm not sure what the fixed rate is right now. I'm guessing it is under 2%.

cptacek · #7 (**permalink**) 06-19-2008, 10:22 PM

Right now the fixed rate interest rate on an I bond is 0%:
Individual - I Savings Bonds Rates & Terms

cooliemae · #8 (**permalink**) 06-19-2008, 10:41 PM

You beat me to it cptacek....

readytorock · #9 (**permalink**) 06-20-2008, 03:56 AM

Quote:

Originally Posted by cptacek

Right now the fixed rate interest rate on an I bond is 0%:
Individual - I Savings Bonds Rates & Terms

Then how are they able to quote the interest rate of 4.84% on the letter they sent? I see on the site you linked they got that number by multiplying inflation by 2. Will inflation *always* be multiplied by 2 to determine the rate of this bond? I'm confused.

noppenbd · #10 (**permalink**) 06-20-2008, 06:14 AM

Quote:

Originally Posted by readytorock

Then how are they able to quote the interest rate of 4.84% on the letter they sent? I see on the site you linked they got that number by multiplying inflation by 2. Will inflation *always* be multiplied by 2 to determine the rate of this bond? I'm confused.

The number on the treasurydirect website represents semiannual inflation (inflation for 1/2 a year) so the yearly inflation would be double that. Therefore TD is saying that current yearly inflation is 4.84% (2.42% every six months). Buying a bond now will get you inflation + 0% for the term of the bonds, so you will only be keeping pace with inflation, not gaining anything. It might be better to wait until the fixed rate portion of the i-bonds increase above 0.

aida2003 · #11 (**permalink**) 06-20-2008, 09:31 AM

Quote:

Originally Posted by noppenbd

It might be better to wait until the fixed rate portion of the i-bonds increase above 0.

It's the first time the fixed rate went to 0%. It makes me wonder, can it go 'negative'? It sounds like an absurd idea, but can it?

jIM_Ohio · #12 (**permalink**) 06-20-2008, 09:53 AM

Quote:

Originally Posted by cptacek

Right now the fixed rate interest rate on an I bond is 0%:
Individual - I Savings Bonds Rates & Terms

that is what I heard too- if OP can get the fixed rate at 4.x%, that is a good deal.

disneysteve · #13 (**permalink**) 06-20-2008, 10:05 AM

Quote:

Originally Posted by jIM_Ohio

that is what I heard too- if OP can get the fixed rate at 4.x%, that is a good deal.

No, you cannot. The fixed rate, as noted, is currently 0%. The inflation rate is variable and changes every 6 months. There is no way today to get a fixed rate above 0%. If the letter from the company says the 4.84% is locked in for 30 years, that is incorrect.

cooliemae · #14 (**permalink**) 06-20-2008, 10:39 AM

Quote:

Originally Posted by aida2003

It's the first time the fixed rate went to 0%. It makes me wonder, can it go 'negative'? It sounds like an absurd idea, but can it?

No, the fixed rate will never go below zero.