Disclaimer

This blog contains some simple tips and advice from two regular guys. We're not accountants, financial advisors, or brokers, so follow, ignore, or discuss our ideas as you see fit.

Friday, August 22, 2008

Savings Bonds Revisited

Posted by Paul

If any readers recall my earlier post from 2007 on savings bonds they'll recall that I purchased some and that I wasn't too excited about them at the time.

Well imagine my surprise to discover that currently my savings bonds have an interest rate of over 6%. This is far better than my savings accounts or even my CD's!

I wanted to double check the program that I downloaded that tells me the current rate of my savings bonds, so I went to the page on Series I bonds and confirmed the numbers.

Currently the determined inflation rate is 2.42%, and the bonds that I bought back in 2006 have a fixed rate of 1.4%.

Using the formula we get:

Composite rate = Fixed rate + (2 x Semiannual inflation rate) + (Fixed rate x Semiannual inflation rate)

Composite rate = 0.016 + (2 x 0.0242) + (0.016 x 0.0242)
Composite rate = 0.016 + 0.0484 + 0.0003872
Composite rate = 0.0647
Composite rate = 6.47%

So currently my bonds are earining almost 6.5%. Wow! Pretty good for such a low risk investment!

So what does this all mean? Well I guess it means that if you purchase I-Bonds when the fixed rate is high (the fixed rate doesn't change for the life of the bond), then you can make a great return when the conditions are right.

As an example, let's pretend that I had purchased some I-Bonds back in May of 2000 when the fixed rate was 3.6, their current interest rate would be:

Composite rate = 0.036 + (2 x 0.0242) + (0.036 x 0.0242)
Composite rate = 0.036 + 0.0484 + 0.0008712
Composite rate = 0.0844
Composite rate = 8.4%

That'd be a pretty amazing return for a no risk investment.

I plan on continuing to watch the I-Bond rates and purchase some more bonds once the fixed rate gets up to a decent amount. It's nice to have part of my money in a low risk investment that has a built in guard against inflation.

1 comment:

Savings Bond Calculator said...

This is a great formula to check composite rate.I tried and it worked. I also use a savings bond calculator when I need to calculate the exact return I would get at the end.