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The New Savings Bonds... Page 2
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The interest rate on the I series bonds has two components: a fixed rate component and an
inflation component. The fixed rate component will apply for the life of the bond. If you
bought an I series bond now -- before the end of October 2000 - the fixed rate is 3.6
percent. The inflation component is calculated based on the Urban Consumer Price Index
(CPI-U) and, through October 2000, it is 3.82 percent. As a result, the current yield on I
series bonds is 7.49 percent. Try to beat that right now in the stock market! The fixed
rate alone is earning a higher rate of return than the popular broad market index, the
Standard and Poor's 500.
Series I bonds have other attractive features. They can be bought at face value in many
denominations -- from as low as $50 to as high $10,000. They earn interest monthly, for as
long as 30 years, and it is compounded semi-annually. They are exempt from state and local
taxes and federal taxes can be deferred until they are cashed in. You do have to accept a
penalty, however, if you cash in the bonds before five years as they are meant to be a
stable, long-term investment. They can even be bought online!
Savings bonds, and bonds in general, do indeed have a place in your portfolio. They will
help you hedge against the risk you take on through investing in the stock market. They
can be the stable, fixed income core of your portfolio. Remember, however, that our
economy goes through natural business cycles. Sometimes, Series I bonds will earn more
than the market. More often, they will, on average, earn less. But they will always
protect a portion of your investment during the down times in the stock market.
I never thought that I, a modern woman, a woman of the 90s, would buy a savings bond! But,
recently, I did just that. I bought an I-series bond and gave it as a gift to my newborn
cousin, Grace. She'll thank me when she starts to college!
Stay tuned to this column for future articles on how to use bonds as part of your
investment portfolio!
Copyright © 2000 Rosemary Carlson.
Rosemary Carlson is a freelance columnist and
feature writer in personal finance, investments and the financial markets. She has been a
Professor of Finance at Morehead State University for 18 years and worked extensively in
the online learning area in finance. Visit Dr. Carlson's homepage at http://www.carlsonwriterprofessor.com or
email her at rcarlson@mis.net. |
