It works for me, but it depends on how you value the miles you get, which, in turn, depends on how you use them. You give up 1/4 of 4.66%, or 1.165% for the I bonds, and only 1/4 of 2.66%, or 0.665% for the EE bonds. I think most everyone would find the recyclying of the EE bonds worthwhile. And most everyone who flies internationally and/or business or first class would find recyclying of the I bonds worthwhile. This is especially true for those of us who probably won't keep all of our bonds for the full term anyway. I will keep a few for emergency money, but for most there are better tax free (and even taxable) investements.

For the method of computing the value of your miles, see the Value of Miles page on my web site below.

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Free Frequent Flyer Miles

The second penalty hardly matters. If you time the purchase right (pgary's web site has details) you'll earn double interest for over 2 months. That practically cancels out the penalty: you certainly don't lose 1/4 of 4.66%, or any calculation along those lines. The miles more than make up for the amount that you do lose, even if you value miles very conservatively.

More significant is the fact that new I-bonds have a lower fixed rate than older ones. The longer you hold them, the bigger a drain this becomes.

--ss

I just called up Citi customer service for my AAdvantage World Gold Card. The woman on the line said that using the card to get a savings bond would count as a cash advance, not a purchase (therefore making it ineligible for miles). If this is incorrect, please let me know.

Also, you can't use a credit card at all to buy bonds on the TreasuryDirect website. You can only use a card if you're buying the bond at a bank or credit union, and even then only until Dec. 03.

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She is wrong. I've purchased bonds as recently as this month from www.savingsbonds.gov with the same credit card you have, and they have all been posted as purchases and have received miles.
She needs to go back to Citibank Customer Service School.
You are right about TreasuryDirect. You can't use a credit card there. Just electronic transfers from your bank account.

[This message has been edited by burgerwars (edited 07-16-2003).]

From the webite:

Q:Is this considered a merchandise purchase or a cash advance?
A: Your savings bond purchase is treated as a merchandise purchase. It is not a cash advance.

I'm sure you are aware of this, but the maximum interest lost is 3 months, regardless of how long you hold the bonds. (Minimum holding period is one year.) After 5 years there is no interest penalty. Also, the lost interest you calculated is correct if you redeem bonds now. Since the interest rates on the bonds change every 6 months (next change is November 1), the interest lost will change as well.

For the cash portion of your investment holding (or as emergency money), I don't believe there is a better investment right now. The bonds are risk-free and there is nowhere I know of that pays 2.66% or 4.66% tax-deferred. The rates will change in November and its very likely that the I-bond rate will drop significantly. If 6 month CPI change stays at 0% which is a real possibility, my understanding is the bond will only pay the fixed rate of 1.1%. That suggests to me that the EE bonds may be a better purchase at the moment. Thoughts?

First of all, it is possible to earn less than then 1.1% fixed portion of the I bond in the next six months if there is deflation - which has occurred for the first 3 out of 6 months for period considered for the rate change in November. That said, even if the rate earned on the I bond for the 2nd 6 months is 0%, you still earn an annual return of 2.33%. With the EE bonds, based on current trends, lets say the new rate is 2.5% in November (probably not that high). Even if that is the case, you still only ear 1.96% for the year. The primary reason for this is the 2nd 6 month interest is not too important given half is eaten by the penalty and 1/2 of 0 is 0. If this isn't for miles and is for a long-tem investment, I think there is a strong argument to buy the EE right now.

I wanted to try out a small purchase to understand how this works in practice. I bought 1 $1000 I bond.

My questions are as follows:
-Does it make sense to buy more smaller denomination bonds?
-What happens if they get lost/stolen in the mail? (or lost or destroyed period?)

Smaller denominations help if you plan on redeeming in small denominations (you don't need all the money back at once). But buying 100 $50 I bonds for $5000, instead of, lets say, 5 $1000 I bonds, is sure a lot less paper to worry about. And to redeem 100 I bonds at once would make a nervous wreck of your teller at your bank. Plus you'll have to sign and fill out the backs of all the bonds upon redemption. But, basically, it's just your own individual financial needs in determining the denominations you want.
As far as lost or stolen, I've never had them lost in the mail being sent to me, so I can't say how easy that is to be replaced.
If you already have bonds, I do suggest making notes of the serial numbers and keep them in a separate place. That way you can tell which ones are missing, if that happens at a later date. Otherwise, if you lost a portion of your bonds, it wouldn't be an easier chore figuring out the ones that are gone.
Again, I've never lost a bond, so I have no experience in this. But I would think the Treasury would be able to pull from their computer a list of bond serial numbers registered to your social security number, if your bonds were lost or destroyed along with not knowing the serial numbers.

You might try the Savings Bond Calculator/Inventory avail on the Treasury's web site. It allows you to add/delete bonds and update the value monthly. (Be sure to save your inventory to your local drive!)

http://www.publicdebt.treas.gov/sav/savcalc.htm