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Re: Confused about I-Bond rates
Old 05-01-2006, 04:46 PM   #21
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Re: Confused about I-Bond rates

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Originally Posted by DOG51
Well I've been grouped with the clueless small fry and a rubes today.* Think i'm gonna go home and cry in my beer.*
Yeah, I think we are seeing why Brewer works behind the scenes. Please pass the empathy?

Ha
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Re: Confused about I-Bond rates
Old 05-01-2006, 04:48 PM   #22
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Re: Confused about I-Bond rates

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Originally Posted by HaHa
Brewer, I wish you could maybe run through the calculation that gives you CPI + 3% from ISM.

As I figure it, it is nowhere near that except with fairly extreme assumptions. As long as you buy ISM at a discount, you will get some amount>2.05% over CPI. (Unless delta CPI is negative. The monthly floor is 0, not (0+2.05)/12)

How much over CPI will depend on reported CPI in every monthly period. For example, I made a spreadsheet. If ISM is bought at $22.50, it returns at least 3% over CPI only if CPI is 6.5% or greater. The actual calculation is very complex, since it is figured monthly. But as a generalization, if you bought at $22.50, and CPI was regular 6.5% *over the previous years corresponding month, then you would indeed get 3% over CPI. Otherwise, less.

If I am missing something, could you help me to see what I am misunderstanding?

Ha
I can't see your spreadsheet, so I've no idea what you did right or wrong. *Bt it sure sounds like you took a major turn into left field and maybe ran right through the fence to go join Greg and Rothbard in the basement.

I'm a lazy person at heart, so if I can think my way through something I won't actually do the math. *This is one of those cases. *Let's assume that the CPI adjustment never goes negative. *I know its a faulty assumption, but I don't feel like mucking about with Black-Scholes based interest rate options simulators to actually determine the value of the embedded floor I am giving away. *So if that is the case, we have an instrument that pays CPI plus 2.05% on par of $25. *If it sells at a discount to par, you have two sources of extra yield over the stated coupon: 1) the leverage you get on the coupon and 2) the accretion up to par as we get closer to maturity. *From door #1, you get aditional yield of (2.05% times (25/22.50)) - 2.05% = about 23BP. *From door #2 you get about another 96BP. *The way I get this is to take 22.50 and multiply it by (1+X)^11, plugging in numbers for X until I get to 25. *So I see totla yield over CPI of 2.05 plus .23 plus .96 equals 3.24%. *Note that this is the yield in addition to whatever CPI is.

That's how I get to CPI plus over 3%. *Now I gave away an embedded floor, but I am willing to do so at these prices. *You do the same thing with an I Bond, which is the main thing I am comparing ISM to.
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Re: Confused about I-Bond rates
Old 05-01-2006, 04:49 PM   #23
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Re: Confused about I-Bond rates

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Originally Posted by DOG51
Well I've been grouped with the clueless small fry and a rubes today.* Think i'm gonna go home and cry in my beer.*
Sorry. I guess I could have been more politic. I just think the treasury is taking advantage of people and I don't like it.
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Re: Confused about I-Bond rates
Old 05-01-2006, 05:00 PM   #24
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Re: Confused about I-Bond rates

Okay, I give up. What is ISM? And while we're at it, what's all the dryer sheet mumbo jumbo? :
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Re: Confused about I-Bond rates
Old 05-01-2006, 05:03 PM   #25
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Re: Confused about I-Bond rates

For the past 2 years I have been buying small I Bonds for my young grandchildren (ages 3 and 1 yrs old). I buy for their birthdays and Christmas thinking it would be helpful for them in 15 years or so. After reading this ,I`m not so sure about that. Can anyone suggest something better ? Thanks for any help
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Re: Confused about I-Bond rates
Old 05-01-2006, 05:05 PM   #26
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Re: Confused about I-Bond rates

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Originally Posted by Dancer373
For the past 2 years I have been buying small I Bonds for my young grandchildren (ages 3 and 1 yrs old). I buy for their birthdays and Christmas thinking it would be helpful for them in 15 years or so. After reading this ,I`m not so sure about that. Can anyone suggest something better* ? Thanks for any help* *
TIPS. As brewer said, the treasury has been offering below-market yields on i-bonds, but they can't get away with that on TIPS.
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Re: Confused about I-Bond rates
Old 05-01-2006, 05:08 PM   #27
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Re: Confused about I-Bond rates

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Originally Posted by scrinch
And while we're at it, what's all the dryer sheet mumbo jumbo? :
A forum legend...
http://early-retirement.org/forums/i...82830#msg82830

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Re: Confused about I-Bond rates
Old 05-01-2006, 05:28 PM   #28
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Re: Confused about I-Bond rates

Hey Wahoo, while you're at it, look up all the threads where I said i-bonds stunk and was considered an idiot for recommending cd's and money markets...

And tips arent much better given you have to hosey up the tax money every year on income you dont get for 10 or 20 years, then maybe you also get to sell them at a loss if rates pop up and CPI stays low and nobody wants them anymore.

1% "cpi adjusted" return (I give up on continuing to point out the lack of 'real'ness to it) isnt worth anything. 2% isnt much better.
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Re: Confused about I-Bond rates
Old 05-01-2006, 05:44 PM   #29
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Re: Confused about I-Bond rates

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Originally Posted by Cute Fuzzy Bunny
2% isnt much better.
Real yield curve today is 2.27% to 2.48% (for 5-20 year maturity). CPI-U for the last 12 months was 4.1%.

So, TIPS still look better than cash, but if you're looking for a short-term place to park cash, 6% CD's look fine to me.

There is simply no reason to accept 1% (or 1.4%) real for i-bonds when you can get over 2% real from TIPS.
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Re: Confused about I-Bond rates
Old 05-01-2006, 05:44 PM   #30
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Re: Confused about I-Bond rates

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Originally Posted by Cute Fuzzy Bunny
Hey Wahoo, while you're at it, look up all the threads where I...was considered an idiot...
CFB, you have to understand I'm 59 and the few good years I have left aren't going to be spent doing endless research.

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Re: Confused about I-Bond rates
Old 05-01-2006, 06:41 PM   #31
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Re: Confused about I-Bond rates

I just hope all y'all appreciate all the easy slow lobs you're getting today...
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Re: Confused about I-Bond rates
Old 05-01-2006, 07:29 PM   #32
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Re: Confused about I-Bond rates

The low overall rate is due mostly to the low inflation portion of the I bond even though the fixed portion is low in comparison to Tips. Over the last 6 months that was not the case so I bond holders did not do that bad.

The low inflation portion had to have an effect on Tips as well but if you bought 5 year Tips last week the fixed is 2.38%.* Thats good.

I bonds held over a year can be redeemed. Take the 3 month penalaty and buy a 26 week T note yielding 4.91% or an Emigrant CD at 5% for a minimum of 9 months or
Leave in Emigrant money market at 4.5% wait until July and buy a 10 year Tip. The yield curve will give you an good indication as to what the fixed portion will be. It was right on the money with the April 5 year auction.


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Re: Confused about I-Bond rates
Old 05-01-2006, 07:45 PM   #33
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Re: Confused about I-Bond rates

I wouldn't buy I-Bonds again until the fixed rate gets at least to 3.5% to 4.0%.
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Re: Confused about I-Bond rates
Old 05-01-2006, 08:09 PM   #34
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Re: Confused about I-Bond rates

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Originally Posted by retire@40
I wouldn't buy I-Bonds again until the fixed rate gets at least to 3.5% to 4.0%.
I wouldn't be surprised if it never gets that high again. They are much more popular now than they were when they first came out. I'm actually surprised that the fixed jumped as high as 1.4% in one shot this time.

Bpp
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Re: Confused about I-Bond rates
Old 05-01-2006, 08:22 PM   #35
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Re: Confused about I-Bond rates

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I wouldn't buy I-Bonds again until the fixed rate gets at least to 3.5% to 4.0%.
You may live that long.*

Ha
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Re: Confused about I-Bond rates
Old 05-01-2006, 08:57 PM   #36
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Re: Confused about I-Bond rates

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Originally Posted by HaHa
You may live that long.*

Ha
I bought some in June of 2000 with a 3.6 fixed rate that gave me about 9% for the past 6 months. That was only 6 years ago, so I can see that happening again in the not too distant future.
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Re: Confused about I-Bond rates
Old 05-01-2006, 09:26 PM   #37
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Re: Confused about I-Bond rates

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Originally Posted by Cut-Throat
Actually, I bought them in December of 2004 - If I check the Treasury Direct Account today, It still lists 6.73% as the interest rate. Do you know to find out what my 'real' rate of return is?

The website does not seem to have very specific info on what portion is real and what portion is inflation adjusted.
I noticed the same issue awhile back. Your rate will change on the anniversary (mod 6 mo) of your purchase.
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Re: Confused about I-Bond rates
Old 05-01-2006, 09:33 PM   #38
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Re: Confused about I-Bond rates

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Originally Posted by retire@40
I bought some in June of 2000 with a 3.6 fixed rate that gave me about 9% for the past 6 months.* That was only 6 years ago, so I can see that happening again in the not too distant future.
You were very sharp to pick those up at that time.

I got some in fall of 2001 I think, @ 3% fixed. I hadn't been aware of I-Bonds prior to that. My feeling is that these were new at that time, and the whole investing class of people was sure they could make 50% a year minimum on NASDAQ stocks. So I-Bonds had to be a bargain to get off the ground.

I think given their characteristics of liquidity, tax deferral and lack of market risk they would be a reasonable deal at even 2%, especially since you are not locked in very long. IMO, they are not all that bad even at present.

Brewer, thanks for the explanation. I couldn't find my Excel Functions book, so I ignored the amortization of the discount and just dealt with current yield. I can see now that the amortization is meaningful.

Ha
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Re: Confused about I-Bond rates
Old 05-02-2006, 06:29 AM   #39
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Re: Confused about I-Bond rates

CT,

Before you unload your I-Bonds, make sure that you have received all of the high 6.73% interest payments due you. For I-Bonds held less than five years, there is a three month interest penality that also "delays" the interest that you receive for three months.

In other words you may still have some more 6.73% payments due you.

Lance
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Re: Confused about I-Bond rates
Old 05-02-2006, 06:45 AM   #40
 
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Re: Confused about I-Bond rates

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Originally Posted by Lancelot
CT,

Before you unload your I-Bonds, make sure that you have received all of the high 6.73% interest payments due you. For I-Bonds held less than five years, there is a three month interest penality that also "delays" the interest that you receive for three months.

In other words you may still have some more 6.73% payments due you.

Lance
Thanks for the tip! - I did send them an e-mail asking about this specific issue!


Update:

Yup, you were correct! - I got an e-mail from them and I will continue to receive the 6.73% for another 3 months. I'll dump them in August!
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