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Newbie Savings Bond Question -- Is it this simple?

Newbie Savings Bond Question -- Is it this simple?

Old Jul 11, 03, 9:17 am
  #1  
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Newbie Savings Bond Question -- Is it this simple?

I've got a CD maturing and was looking at the bonds to buy with a mileage earning credit card.

Current I bond rate = 4.66%. Hold 1 year and turn in. Lose 3 months interest. Therefore, approximiate yield = 3.4%. Highest 1 year CD rate is 2.25%.

Is it that simple or am I missing something? The only thing I can see is that the I bond rate will change in November and might go down, but it would have to go down significantly to not beat the CD rate by a lot.

Thanks for you help.
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Old Jul 11, 03, 10:06 am
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<font face="Verdana, Arial, Helvetica, sans-serif" size="2">Originally posted by zachary:
I've got a CD maturing and was looking at the bonds to buy with a mileage earning credit card.

Current I bond rate = 4.66%. Hold 1 year and turn in. Lose 3 months interest. Therefore, approximiate yield = 3.4%. Highest 1 year CD rate is 2.25%.

Is it that simple or am I missing something? The only thing I can see is that the I bond rate will change in November and might go down, but it would have to go down significantly to not beat the CD rate by a lot.

Thanks for you help.
</font>
You've got the basics down pretty well. To add to this, if you time the purchase correctly (after your credit card closing date, and before the end of the month) you can effectively reduce the 3 month interest penalty. This assumes you don't carry a balance on your credit card.

Also, the bonds are state tax free, which also makes them more attractive than cd. and of course, the reason they are on FlyerTalk- you can get miles for purchasing them.
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Old Jul 11, 03, 10:51 am
  #3  
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the interest rate may change. it is re set on 6 month anniversarys. you buy an i bond today, it is dated july. in january , the rate changes to whatever is determined as of november 1, which is used until july 1 at which point the rate changes to the calculation of may 1 , 2004. the same applys to ee bonds. the i bond rate could go to zero in theory.

do a search on this topic in this forum...there is a lot of verbage on it.

edit to add...also study the savings bond direct web site. you need it to order.

[This message has been edited by clacko (edited 07-11-2003).]
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Old Jul 11, 03, 11:41 am
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<font face="Verdana, Arial, Helvetica, sans-serif" size="2">Originally posted by clacko:
the interest rate may change. it is re set on 6 month anniversarys. you buy an i bond today, it is dated july. in january , the rate changes to whatever is determined as of november 1, which is used until july 1 at which point the rate changes to the calculation of may 1 , 2004. the same applys to ee bonds. the i bond rate could go to zero in theory.</font>
Also keep in mind that the 3-month interest penalty for redempting within 5 years is calculated based on the last 3 months of interest earned. Hypothetically, if i-bond rates did go to zero towards the end of your holding period, your forfeited interest might also go to zero! (However, this works against you if rates go up during the latter part of your holding period.)
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Old Jul 11, 03, 12:16 pm
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Here is something to consider and I'm afraid I do not know the answer as to why the interest calculates out this way - use the savings bond calculator on the government's website and you will find that $1000 used to buy an I bond in June of 2002 will now be worth $1028 so in the simplest of terms the $1000 has earned $28 or 2.8% interest since last June. Of course the 3 months of interest that would be forfeited if the bond was cashed in is not included but that still leaves a lower interest yield than I would have expected, especially considering that the interest rates were higher last summer when the bond was purchased as well as the period from Nov-May when the interest rate was adjusted. The 4.66% current rate which when into effect in May is therefore the lowest rate that would have been paid during the life of the bond yet the effective yield is not even as high as the 3.4% that you had calculated as the yield after the three month penalty. As I said I do not know why it is this way, just happened to notice when I was doing some calculations a few weeks ago. If anyone has any insight as to what I am missing please feel free to share.
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Old Jul 11, 03, 1:11 pm
  #6  
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I'm perplexed as well by the savings bond calculator. With higher interest rates on bonds last year, there is no way the yield should be as low as it is, even removing the interest penalty.
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Old Jul 11, 03, 2:23 pm
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some other drawbacks -

-I bonds are limited to $30K per year per social. Therefore, don't list a beneficiary's social.

-can buy another $15K (30 face) EE bonds, but these have a lower rate.

-minimum 12 mos holding period - less liquidity.

-can't be used as collateral.

-ability to purchase by credit cards ends in Dec. 03.
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Old Jul 11, 03, 4:51 pm
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The good side:

--great interest rate

--federal tax deferred until cashed OR pay
each year, your choice
--ff miles w/cc purchase
--no state income tax
--you can decide to keep as long as it is the best deal out there, even if you forced to get this better interest rate for 10, 20 or 30 years!
--income is not reported, "no asset"
--no statements to handle, monthly or whatever
--government issued (better that FDIC, not limited to $100,000).
--you do not have to pay a penalty if you keep for at least 5 years
--easily replaced if lost
--buy on the computer
--use as gifts, and cc to more miles

Note a correction on a previous post, I believe the limit on EE's has been doubled

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Old Jul 11, 03, 4:56 pm
  #9  
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For full information on how best to buy savings bonds, including the use of 0%, $0 fee balance transfer deals (free money!), read the info on the Finance page of my web site below.

Remember that this is the last year you can do this. Be sure to make use of credit cards that give you bonus miles, like the Delta and Starwoods American Express cards.

------------------
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Old Jul 15, 03, 3:17 am
  #10  
ss
 
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<font face="Verdana, Arial, Helvetica, sans-serif" size="2">Originally posted by HawaiiBound:
$1000 used to buy an I bond in June of 2002 will now be worth $1028 so in the simplest of terms the $1000 has earned $28 or 2.8% interest since last June.... The 4.66% current rate which when into effect in May is therefore the lowest rate that would have been paid during the life of the bond....</font>
- The rate in June '02 was 2.57%, so your bond began life earning less than you remember.
- The 4.66% rate from May '03 applies only to bonds purchased since then. The current rate for your (older) bonds is actually higher: 5.58%.
- Since you bought your bonds in June '02, the 5.58% rate went into effect this June, not May.
- The current rate is irrelevant anyway, since all interest earned at that rate is lost to the early redemption penalty built into the calculation.

In the 13 months since the bond was issued, it earned 2.57% for the first six months, 4.48% for the next four, and 0% for the final three (that's the early redemption penalty). So $28 is just what's expected.

--ss


[This message has been edited by ss (edited 07-15-2003).]
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Old Jul 15, 03, 10:25 am
  #11  
 
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After buying these bonds, can you move these bonds into a brokerage account for safekeeping and custody?
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Old Jul 15, 03, 11:33 am
  #12  
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Brandy

I believe you will find brokerage houses not participating in I and EE bonds. They do sell treasury funds, but not these bonds. It is therefore not a function for them to hold your paper bonds.

They are quite safe and can be replaced if lost.

Perhaps some of this will become mute in the future as they start issuing "E"bonds, that is electronic.
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Old Jul 15, 03, 1:24 pm
  #13  
 
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ss, thanks for your reply and explanation. I did not buy any bonds last year, I was just playing with the savings calculator on the website one day and noticed what I thought was a discrepancy. I did not discover FlyerTalk and thus the thrill of buying bonds to earn miles until this year, bought our first bonds in January and with the Delta double miles promo (my husband and I both have Delta AMEXs) we have tapped out our maximum for bonds for this year. What threw me on the rates was on this page http://www.savingsbonds.gov/sav/sbirate2.htm I saw the chart at the bottom with rates for prior periods saying May 2002-Oct 2002 with a rate of 5.58%. I thought that was the rate at the time of purchase, did not realize that is the rate it is earning now. Thanks again for the clarification. Even though I thought the interest might not be as high as expected it still seemed like a great deal especially with the double miles. As for the bonds we bought in January, I can't believe I am now sitting on totally liquid funds that are paying 5.17%. Makes you wonder what is keeping the banks in business nowdays.
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Old Jul 15, 03, 4:42 pm
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<font face="Verdana, Arial, Helvetica, sans-serif" size="2">bought our first bonds in January and with the Delta double miles promo (my husband and I both have Delta AMEXs) we have tapped out our maximum for bonds for this year. [/B]</font>
If you cash in exactly the bonds you bought in January now (or perhaps better, August 1), you can buy the same amount again this year. References to the law establishing this are on my web site below in the finance page.

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Old Jul 15, 03, 7:16 pm
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<font face="Verdana, Arial, Helvetica, sans-serif" size="2">Originally posted by pgary:
If you cash in exactly the bonds you bought in January now (or perhaps better, August 1), you can buy the same amount again this year. References to the law establishing this are on my web site below in the finance page.

</font>
Outside of if you had a need for the miles (starpoints) - does this make good sense? What I'm asking is whether getting a second 3 month penalty (assuming the new bonds will be cashed before 5 years) outweigh the value of the extra miles?

I'm sure someone out there has done the math under a variety of interest rate scenarios.

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