Hefty I bond rate looms
By Laura Bruce • Bankrate.com
The interest rate on the federal government's inflation-fighting savings bond could come in above 6 percent when it's adjusted Nov. 1.
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The current I-bond rate of 4.8 percent consists of a fixed rate of 1.2 percent and a semiannual inflation-adjusted rate of 3.58 percent. (The slight discrepancy is due to the way the composite is calculated.) Both components are adjusted every May 1 and Nov. 1.
The fixed rate, in effect when the bond is purchased, stays with an investor for as long as he owns the bond. The inflation-adjusted component is based on inflation data for the previous six months as measured by the U.S. Consumer Price Index.
Dan Pederson, author of "Savings Bonds: When to Hold, When to Fold and Everything In-Between," says CPI numbers for the previous six months give us an annualized inflation rate of 5.7 percent.
"Combine that with the current I bond's 1.2 percent fixed rate and you get a blended rate of 6.9 percent. But with a rate that high there's a strong likelihood that the fixed rate will get trimmed."
Pederson says he could see the fixed rated coming in somewhere between 0.5 percent and 1 percent. But even if it gets scalped all the way down to 0.5 percent, the I bond would still have a composite rate of approximately 6.2 percent.
You must hold the I bond for at least one year before cashing it, and you'll pay a penalty of three months' interest if you sell it before five years. Pederson suggests that anyone considering buying the I bond do so now, before the Nov. 1 adjustment.
That means you'd get the current fixed rate of 1.2 percent and the current adjustable rate of 3.58 percent for a combined 4.8 percent for the first six months.
In late April your bond would be adjusted for the following six months. You'd have the 1.2 percent fixed rate and whatever inflation component is issued this Nov. 1. If that combined rate is 6.9 percent, you'd average 5.85 percent for the full year.
If you wait until after Nov. 1 there's no guarantee that the fixed component won't be considerably lower. Pederson estimates there's a 70 percent chance the government will lower the fixed rate.
If you buy the current I bond and sell after one year -- using the above scenario -- the interest penalty would leave you with approximately 4.39 percent for the year. If that appeals to you, don't wait until the last minute to buy. Buying before Oct. 25 should ensure you get the current rate.
The other savings bond that is adjusted semiannually is the EE series. It currently pays 3.5 percent. It's a fixed-rate bond, so the rate you get when you buy stays with you until you sell. It has the same holding and penalty provisions as the I bond. Pederson expects the EE's new interest rate to remain right around 3.5 percent.
Bankrate.com's corrections policy -- Posted: Oct. 19, 2005
By Laura Bruce • Bankrate.com
The interest rate on the federal government's inflation-fighting savings bond could come in above 6 percent when it's adjusted Nov. 1.
- advertisement -
The current I-bond rate of 4.8 percent consists of a fixed rate of 1.2 percent and a semiannual inflation-adjusted rate of 3.58 percent. (The slight discrepancy is due to the way the composite is calculated.) Both components are adjusted every May 1 and Nov. 1.
The fixed rate, in effect when the bond is purchased, stays with an investor for as long as he owns the bond. The inflation-adjusted component is based on inflation data for the previous six months as measured by the U.S. Consumer Price Index.
Dan Pederson, author of "Savings Bonds: When to Hold, When to Fold and Everything In-Between," says CPI numbers for the previous six months give us an annualized inflation rate of 5.7 percent.
"Combine that with the current I bond's 1.2 percent fixed rate and you get a blended rate of 6.9 percent. But with a rate that high there's a strong likelihood that the fixed rate will get trimmed."
Pederson says he could see the fixed rated coming in somewhere between 0.5 percent and 1 percent. But even if it gets scalped all the way down to 0.5 percent, the I bond would still have a composite rate of approximately 6.2 percent.
You must hold the I bond for at least one year before cashing it, and you'll pay a penalty of three months' interest if you sell it before five years. Pederson suggests that anyone considering buying the I bond do so now, before the Nov. 1 adjustment.
That means you'd get the current fixed rate of 1.2 percent and the current adjustable rate of 3.58 percent for a combined 4.8 percent for the first six months.
In late April your bond would be adjusted for the following six months. You'd have the 1.2 percent fixed rate and whatever inflation component is issued this Nov. 1. If that combined rate is 6.9 percent, you'd average 5.85 percent for the full year.
If you wait until after Nov. 1 there's no guarantee that the fixed component won't be considerably lower. Pederson estimates there's a 70 percent chance the government will lower the fixed rate.
If you buy the current I bond and sell after one year -- using the above scenario -- the interest penalty would leave you with approximately 4.39 percent for the year. If that appeals to you, don't wait until the last minute to buy. Buying before Oct. 25 should ensure you get the current rate.
The other savings bond that is adjusted semiannually is the EE series. It currently pays 3.5 percent. It's a fixed-rate bond, so the rate you get when you buy stays with you until you sell. It has the same holding and penalty provisions as the I bond. Pederson expects the EE's new interest rate to remain right around 3.5 percent.
Bankrate.com's corrections policy -- Posted: Oct. 19, 2005
