It’s now six months since April, which means it’s time again to partially predict the new I-Bond savings bond rates before the formal announcement until November 1st. Just in case we want to buy some beforehand and lock in some rates.
The CPI-U in March 2007 was 205.352.
The CPI-U in September 2007 was 208.490.
208.490/205.352 = 1.015281, or a semi-annual increase of 1.5281%.
Total rate = Unknown fixed rate + 2 x Semiannual inflation rate + (Semiannual inflation rate X Fixed rate)
If we assume a fixed rate of the current 1.3%, we get
Total rate = 0.013 + (2 x .015281) + (.013 x .015281) = 1.3% + 3.08%
Total rate = 4.38%
Overall, if you buy now in October and lock in your 1.3% fixed rate, you?ll get 3.74% for 6 months and then 4.38% for another 6 months. Not very appealing. Here to hoping the fixed rate jumps some…
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Been moving money out of my Treasury bill 28 day ladder as well into CDs. But these I-bonds are exempt from state tax like the Treasury bills and you don’t pay taxes until you cash them in. Will have to use your calculator to get the equivalent fully taxable rate for an apples to apples evaluation given CA taxes.
I think I-Bonds are a pretty good deal given the tax deferred nature. Effectively you’re getting a 40% premium vs investing in an equivalent annually taxable instrument, regardless of the interest rate or tax rate. That’s according to my empirical calculations. My math is rusty these days so I need to work on my formal proof.
For a long-term investment, it may work out if the fixed rate is high enough. But remember if you redeem with 5 years you have to pay a 3-month interest penalty.
I have started to use the I-bonds as a long-long term savings account for the interest from my 28 day/13 week/26 week T-bill ladder, (my principal emergency funds). While the I-bond might not be the highest earning the low automatic reinvestment level $25 makes it simple to just accumulate the funds monthly without having to transfer them out to my online bank for a 5% MMA for a few weeks and then reinvest.
I consider it part of my “bond” low risk portion of my overall portfolio and also as a part of the overall college fund for my 1 year old. The advantage is the simplicity.
I’m not a money guru either, Its the simplicity that makes the bond attractive but here’s something to think about.
Buy $1000 I bond @ 3.74% interest is approx $37 per year +/- yeild of 4.3% makes it a little better @$43.00 per year. Federal tax deferered state tax exempt.
Buy cd $1000 @ 5% 6 month X(2) yeilds $50 minus 20-28% tax bracket so pay uncle sam and state $10-$14 of your hard earned money…yeild $36.00-$40.00 per year. So you can shop around for rates, run to banks, cash in cd’s a couple times a year and worry about claiming the little bit of interest on your taxes. Or buy a bond throw it in the safety deposit box and don’t worry about it until its time to cash it in. Of course if your a pro-active investor this is not for you but they serve their purpose for low risk, lazy, non agressive investors like myself.
If you buy toward the end of the month and
sell toward the beginning of the month, the
interest rate penalty of 3 months works out
to a little over 1 month which isn’t bad at all
if you wish to sell before 5 years. Even
I-bonds don’t seem to keep up with real
inflation these days.