November 6, 2004 07:56 AM
Small Boost for I Bond; EE Looks Like A Better Deal
Excerpt: Relatively tame inflation means the I bond, the government's inflation-fighting savings vehicle, reaps just a slightly higher interest rate for the next six months.
Relatively tame inflation means the I bond, the government's inflation-fighting savings vehicle, reaps just a slightly higher interest rate for the next six months.
The new compounded rate of 3.67 percent includes a fixed rate of 1 percent and a semiannual adjustable rate of 2.66 percent. The fixed rate stays with investors for as long as they own the bond, while the adjustable rate is pegged to the Consumer Price Index. The rates are reset every Nov. 1 and May 1.
The previous I bond rate was 3.39 percent, with a fixed rate of 1 percent and an adjustable rate of 2.38 percent. (The slight discrepancy is due to the way the composite is calculated.)
The fixed rate of 1 percent for a bond that can be held for 30 years may not entice many investors. A better bet may be the EE ("double E") bond, which follows the same repricing schedule as the I bond, but is pegged at 90 percent of the average five-year Treasury securities for the preceding six months. Its new rate is 3.25 percent, up from 2.84 percent for the previous six months.
"The EE will be a better buy long term because of the fixed rate on the I bond being less than 2 percent," says Dan Pederson, author of Savings Bonds: When to Hold, When to Fold, and Everything In-Between.
"That prediction may look crazy six months to a year from now if inflation spikes because of energy costs, but over the long term I think the EE will outperform an I bond with a 1 percent fixed rate."
Keep in mind that you must wait one year before cashing an I bond or an EE bond. If you cash either bond in less than five years, you'll forfeit three months' interest.
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