<font face="Verdana, Arial, Helvetica, sans-serif" size="2">Originally posted by highgamma:
This has been stated before but bears repeated.
Note, of course, that after the first six months, the bonds can be redeemed at accreted value minus the last three month's interest. Therefore, it's always possible to avoid the negative interest rate. This is not true of standard inflation-indexed bonds. The fact that rates are set on a lagged basis helps you avoid this problem as well. These two features are quite valuable embedded "options" of savngs bond.</font>
And the overall interest rate will never be negative; if the inflation component is more negative than the fixed "real" rate, the adjustment will be held in abeyance until the inflation again "upticks." Mechanically, this is how they guarantee the full principal.
But actually, highgamma, you COULD "theoretically" still be exposed to a negative inflation component cuz it only adjusts every SIX months vs. the THREE month penalty (since the inflation adjustment is made in arrears rather than prospectively).
The option to "put" the bond back to the issuer on any banking day could be incredibly valuable and I know of no other instrument that provides this option WITHOUT exposure to intraday market fluctuations.
And miles too! What a country.
Sorry for the caps and don't mean to shout but too ignorant to figure out how to bold or italicize.