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http://www.treasurydirect.gov/com/comi05...

Top 326. Oct 18, 2001 1:33 PM

» Makena - Re: I-Bonds

In response to message posted by TonyFromGlendale:

I happened to notice this post about buying I-Bonds before the end of the month. I am doing exactly what you suggest, using a Master Card debit card I have which gives a 1.5% cash rebate on purchases but limits them to $3K per day. To buy $30K by the end of October I'm scrambling to make $3K daily purchases. The 1.5% earned will more than offset the interest penalty of 3 months' interest I would pay for cashing the bonds before 5 years if I choose to do so. I-bonds have to be held at least 6 months before they can be cashed at all, but can be cashed before 5 years with the 3 month interest penalty.

Here are a few caveats I discovered:

1. The bonds are dated the month that they collect the money from your credit card, not the month you enter the transaction on the internet. Collection takes a couple of days. If you enter a transaction on October 29th, it is possible the money will be collected Nov 1st, and you will be issued Nov bonds which you don't want.

2. Whether you buy the bond Oct 1 or at the end of the month, you earn interest for the entire month of October, so your incentive is to buy nearest the end of the month.

3. Similarly when you cash the bonds, you get the whole month's interest for the prior month credited on the 1st of the month, so you might as well plan to cash them on the 1st of a month.

4. The maximum single transaction with a credit card on the website is $1000. To buy $30K of bonds, you must input 30 individual transactions for $1000 each, one at a time.

5. You are incorrect about locking in 5.92%. You are locking in the fixed rate of 3.00%, which was set for all bonds issued May 2001-Oct 2001, and will be locked for 30 years on the October bonds. Effective Nov 1, 2001, the fixed rate will be reset for I-bonds issued during the next 6 months, and we are guessing it will be lower which is why we are talking about doing all this before the end of October.

6. The problem with the strategy is the inflation component will also be reset Nov 1, and that WILL apply to your Oct bonds. The inflation component is reset every 6 months for all
I-bonds outstanding. So the rate you earn is going to change on Nov 1, right when your bonds start to earn interest. The inflation component will be the annualized change in CPI-U (Urban CPI) from March 2001-Sept 2001. The last time it was reset May 2001 the change from Sep 2000-March 2001 was 1.44%, then annualized, plus 3.0% fixed, giving 5.92% total annualized yield.

The question is, when this is redone in 2 weeks, what will the number be? Inflation has subsided. CPI-U numbers are:
Sep 2000 173.7
Oct 2000 174.0
Nov 2000 174.1
Dec 2000 174.0
Jan 2001 175.1
Feb 2001 175.8
Mar 2001 176.2
Apr 2001 176.9
May 2001 177.7
Jun 2001 178.0
Jul 2001 177.5
Aug 2001 177.5
Sep 2001 ???

You can verify from the above numbers the calculation of the prior 6 months' inflation at (176.2/173.7-1)*100=1.44%.

Let's assume the Sep number comes in unchanged from Aug, at 177.5. That puts 6 month inflation thru Sep at (177.5/176.2-1)*100=0.74%. Annualized, this would be (1.0074**2-1)*100=1.49%. So a good prediction is that the inflation component for the coming 6 months will be set around 1.49%, then combined with 3.00% fixed, for a total estimated yield of 4.49%. That is what you are locking in, for the following 6 months.

Better than you can find in a CD for a short term, which is why I'm doing it. Less than GNMA, but no risk of principal loss due to market fluctuations.

7. Note if we get deflation, it subtracts from the 3.0% fixed yield but never goes negative. So the worst case would be you get no return at all for 6 months in a time of deflation. Of course, if that happened you could just cash them in and put the money elsewhere.

8. You have a choice to report interest as it is accrued each year, or to report it all at the end when the bond is cashed (the default). Reporting to the IRS is only done when the bonds are cashed, and is reported by the bank where you cash them. Federal taxable only, they are state tax exempt.

http://www.treasurydirect.gov/of/ofcpi10...

-- posted by Makena

Top 327. Oct 18, 2001 5:52 PM

» Rande - Re: Re: I-Bonds

In response to message posted by Makena:

Makena, where you been keepin' yourself? Good analysis.

-- posted by Rande

Top 328. Oct 18, 2001 6:29 PM

» TonyFromGlendale - I-Bonds

My attorney bought two $1,000 bonds on her Visa card naming her two kids as beneficiaries using the webb site.

Somehow it worked okay with her credit card.

-- posted by TonyFromGlendale

Top 329. Oct 18, 2001 6:29 PM

» Kirk - Re: Re: I-Bonds

In response to message posted by Makena:

Thanks for the VERY good info.

Still hard to believe you can get something for nothing re rewards from your credit card....amazing. I wonder who pays for it? SOMEONE has to eat the $300.. discover or the Treasury. Sounds like several cards get around it and charge you so it could be very expensive if you do it wrong... A 3% fee up front then starting a 21% loan for even a month would eat up most of a year's interest. Ouch!

-- posted by Kirk

Top 330. Oct 18, 2001 9:49 PM

» Makena - I Bonds

1. The website says the credit card transactions will be classified as Purchases, and not as Cash Advances. Many people do this to get frequent flyer miles, or in my case cash rebates on their card.

2. The treasury probably has a deal with their credit card processing bank to pay a low fee of 1.5-2.0% on all purchases processed.

3. Savings bonds are also sold at most financial institutions, banks, S&Ls, etc, and I doubt the banks do it for free. Probably the treasury pays a 2%-3% commission to a bank for selling a savings bond the old fashioned way, so if you buy it on their website electronically and they can cut out the middleman's commission they can afford to pay a small % for credit card processing, it is just a wash. Either way, the cost is part of their overhead for making them available nationwide in every bank to market to small investors (the intention).

-- posted by Makena

Top 331. Oct 18, 2001 10:26 PM

» TonyFromGlendale - An I-Bond correction...

My attorney purchased two $1,000 bonds on the webb site using her AADVANTAGE MASTER CARD and received American Air miles. I guess Visa or Master Card really doesn't matter in the long run as long as it works out. A $20,000 bond purchase using my North West Visa card should give me 20,000 miles and that is good for one domestic round trip ticket worth up to several hundred dollars depending on the destination of course and how much a ticket would usually cost.

-- posted by TonyFromGlendale

Top 332. Oct 18, 2001 10:41 PM

» Kirk - Re: I Bonds

In response to message posted by Makena:

. Either way, the cost is part of their overhead for making them available nationwide in every bank to market to small investors (the intention).

Good point re no different than buying a seriesE bond and the bank has to get something. Not very efficient, but that is why they are called "the government"

-- posted by Kirk

Top 333. Oct 19, 2001 7:21 AM

» Thruhiker - are you guys crazy?

i know that this site needs eyeballs to survive, but to actually welcome someone back who has slandered this site in the past, zapped people out of chat who mentioned this site or its resident expert is absolutely beyond my comprehension.

-- posted by Thruhiker

Top 334. Oct 19, 2001 7:36 AM

» Kirk - Re: are you guys crazy?

In response to message posted by Thruhiker:

I appreciate the concern thruhiker, but there are people that are making lies and slander up daily about Rande and myself and posting it at various places around the net. People email me and I often take a look and it is pretty funny once you get past pathetic. One guy actually listed a bunch of my bad buys and left out all the good buys. I had to ask him why would anyone care since I list those bad buys every month for each stock in my newsletter? (I ALSO provide a monthly update that contains EVERY buy and sell I've made since I started the portfolio). Only the very weakest of weak egos need to project an image of perfection and are threatened by their past mistakes being made public.

We are not going to stop the critics so I actually welcome any past critics here where they can contribute and redeem themselves.

Perhaps Makena put 50% of his cash reserves into QQQ at $86 after calling the Marketimer office to double check to see if Bob Brinker still liked them at that price (he did). Perhaps Makena realized "Kirk was right" to warn everyone about Brinker and how he often hides his bad calls thus making you over confident in his overall ability?

BTW, I don't recall ever saying that Brinker was a bad money advisor, just that he makes himself out to be much better than he is and people need to be aware of it. I've actually said most probably do better following him than going it on their own as bullrun and many here prove to us daily.

-- posted by Kirk