Buying I/EE Bonds


P

Prashant

I am planning to buy I bonds this week. I had few questions, Would
appreciate if you can your opinions.

1. Is this a good time to buy bonds, or should i buy them after
sometime - As we are in age of increasing interest rates.

2. With the increase in interest rates, I guess the bond yield would
remain same - however would Bond Value go down to maintain same yield.
Would the Bond value going down hurt me ?

3. This is the first time I am planning to buy bonds. My current
investments are in Cash only. I am planning to have bonds as 20% of my
portfolio and would like to keep the money in bonds as long as I don't
need it - maybe for 15-20 or more years.

4. Any other piece of advice.

Regards,
pr
 
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J

John A. Weeks III

Prashant said:
I am planning to buy I bonds this week. I had few questions, Would
appreciate if you can your opinions.

1. Is this a good time to buy bonds, or should i buy them after
sometime - As we are in age of increasing interest rates.
It depends on what your goals are. The Fed has indicated that
they plan to continue to raise interest rates. As a result, it
is not a good time to be buying bonds if you plan to or may have
a need to sell before maturity. You will be taking the credit
risk. If you plan to hold to maturity, then rising rates will
not impact you since you will get your full face value back.

-john-
 
R

Ron Peterson

Prashant said:
I am planning to buy I bonds this week. I had few questions, Would
appreciate if you can your opinions.
1. Is this a good time to buy bonds, or should i buy them after
sometime - As we are in age of increasing interest rates.
Wait, interest rates are going up.
2. With the increase in interest rates, I guess the bond yield would
remain same - however would Bond Value go down to maintain same yield.
Would the Bond value going down hurt me ?
A decrease in bond value would mean less money for emergencies.
3. This is the first time I am planning to buy bonds. My current
investments are in Cash only. I am planning to have bonds as 20% of my
portfolio and would like to keep the money in bonds as long as I don't
need it - maybe for 15-20 or more years.
Ladder your bonds by buying various maturities. Start out with shorter
maturities and as the rates go up, buy longer maturities.
 
J

John H. Fisher

I am planning to buy I bonds this week. I had few questions, Would
appreciate if you can your opinions.

1. Is this a good time to buy bonds, or should i buy them after
sometime - As we are in age of increasing interest rates.

2. With the increase in interest rates, I guess the bond yield would
remain same - however would Bond Value go down to maintain same yield.
Would the Bond value going down hurt me ?

3. This is the first time I am planning to buy bonds. My current
investments are in Cash only. I am planning to have bonds as 20% of my
portfolio and would like to keep the money in bonds as long as I don't
need it - maybe for 15-20 or more years.

4. Any other piece of advice.
As part of your portfolio, bonds are a more secure investment than are many
others. I'll not render advice on your particular portfolio but you can find
information on these bonds at:

http://www.savingsbonds.gov/




"Jack" - John H. Fisher - (e-mail address removed)
Philadelphia, Pa - Atlantic City, NJ - West Wildwood, NJ
My Newsgroups & Boards at: http://members.aol.com/TaxService/index.html

Where Ignorance is bliss, 'tis folly to be wise!=:)
 
R

Rich Carreiro

Ron Peterson said:
^^^^^^^


A decrease in bond value would mean less money for emergencies.
Read what the original poster said -- he's buying savings
bonds. Savings bonds do not decline in value as interest
rates rise (nor do they increase in value as interest
rates fall).
 
T

Tad Borek

Prashant said:
I am planning to buy I bonds this week. I had few questions, Would
appreciate if you can your opinions.

1. Is this a good time to buy bonds, or should i buy them after
sometime - As we are in age of increasing interest rates.

2. With the increase in interest rates, I guess the bond yield would
remain same - however would Bond Value go down to maintain same yield.
Would the Bond value going down hurt me ?
Rather than worry about the specifics, just think of how they work...EE
bonds pay you interest based on the latest 5-year Tresury bond yields,
the rate is set at 90% of the 5-yr bond rate. I bonds pay you interest
equal to a "fixed rate" plus a rate equal to the inflation rate, as
defined by the Consumer Price Index (CPI). The rate on both resets every
6 months. For both, your interest compounds, and you don't pay taxes
until you cash in the bond (unless you choose to report it each year).

So both bonds will have changing rates as you hold them, it's just that
the way they adjust is different.

And because the rates will change to match the "current" rates, the
timing of your purchase isn't quite as critical. It's not as if you're
locking yourself into 20 years of a set interest rate (as you would be
with other types of bonds). Savings bonds are somewhat unique in this
way and the normal discussions about bonds don't necessarily apply.

One thing to keep in mind about I-bonds is that the fixed rate right now
is only 1%, meaning you'll earn (1% + inflation) for as long as you hold
it. That may be OK, at least you'll earn more than the inflation rate
which isn't bad for a completely safe investment. But the early I-bonds
came with higher fixed rates - here's the history:
http://www.publicdebt.treas.gov/sav/sbirate2.htm

E or I? If you worry about inflation, you might prefer I. You could
always split the baby and buy both.
3. This is the first time I am planning to buy bonds. My current
investments are in Cash only. I am planning to have bonds as 20% of my
portfolio and would like to keep the money in bonds as long as I don't
need it - maybe for 15-20 or more years.
Savings Bonds (I or EE) aren't a bad "next step." They're not much
riskier than cash/money-market really. Just don't misplace them or the
serial #s!

-Tad
 
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J

JD

One thing to keep in mind about I-bonds is that the fixed rate right now
is only 1%, meaning you'll earn (1% + inflation) for as long as you hold
it. That may be OK, at least you'll earn more than the inflation rate
which isn't bad for a completely safe investment. But the early I-bonds
came with higher fixed rates - here's the history:
http://www.publicdebt.treas.gov/sav/sbirate2.htm
I'm considering I-bonds as well, and I'm thinking the penalty for selling
before the 5 year holding period is really not that bad. Every time I think
about it I change my mind on inflationary and deflationary pressures, but
the bottom line is I'm only guessing and I don't know which will prevail.
(Regarding the effects of rapid credit expansion I see it different than
some with rapid credit expansion, *sometimes followed historically by
liquidity problems and a deflationary period. On the contrary most agree
rapid rise in money supply is inflationary).

With the I-bonds I feel safe against inflation until stocks, bonds, and dare
I say real estate return to more historically average valuations. (15 pe,
or 4.3% dividend yield for the s&p 500, and 3.7 X median household income
for housing)

Anyway, am I missing something with cashing the bonds early?
Also what would happen in a deflationary situation when the cpi would
actually be a negative number?

From the treasury website:

http://www.publicdebt.treas.gov/sav/sbifaq.htm#sbifaq2
"You can cash Series I bonds after 12 months. When you cash the bonds, you
will receive the original investment plus the earnings. However, I Bonds are
meant to be longer-term investments. So, if you redeem an I Bond within the
first five years, there is a 3-month earnings penalty. For example, if you
redeem an I Bond after 18-months, you'll get 15 months of earnings."

So if interest rates are much higher in say 2-1/2 years, I can sell them and
loose just 3 months of interest, and then I assume buy I-bonds (or other
bonds) at the higher rate, if it makes sense.

Regards,
JD
 

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