I Bond, iBonds, i-Bonds or Series I bonds.
- KLR
- KLR
- duggi
- mtpirate
- duggi
- Thruhiker
- duggi
- Thruhiker
- mtpirate
- radiodude
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» KLR - Certificates of Deposit Inflation-Protected
In response to message posted by Thruhiker:.
Certificates of Deposit Inflation-Protected (CDIPs)
[CDIPs may be issued with maturities ranging from 3-10 years, allowing investors to structure a portfolio to specific time horizons. Current base rate is 1.5% to 2.4%]
CDIPs are a new investment alternative created to assist in offsetting the effects of inflation. These innovative CDs are similar to U.S. Treasury Inflation-Protected Securities (TIPS), where the principal amount is adjusted periodically to reflect changes in inflation.
CDIPs pay a stated fixed rate of interest like a traditional CD, however interest is paid semi-annually on an inflation adjusted base amount, not the original investment amount. At maturity, additional interest is paid equal to the total increase (if any) of the inflation-adjusted base over the original investment.
Thus, both the final payment at maturity and the periodic interest payments increase as inflation rises.
Like TIPS, CDIPs use the non-seasonally adjusted Consumer Price Index for All Urban Consumers2 (CPI) as a reference to measure inflation. CPI is the most widely recognized indicator of the changes over time in prices for consumer goods and services in the United States.
On each semiannual interest payment date, the base amount on which interest is paid is adjusted to reflect the change in CPI since the previous coupon date. Thus, if prices (as measured by CPI) have risen 2%, the inflation-adjusted base will also increase by 2%. Semiannual interest is determined by applying the stated interest rate of the CD to this inflation-adjusted base.
-- posted by KLR
» KLR - Re: Re: U.S. AUGUST CPI UP 2.2% OVER 12 MONTHS
In response to message posted by mtpirate:.
Savings bond expert Dan Pederson, author of Savings Bonds: When to Hold, When to Fold, and Everything In-Between, says he expects the combined rate to plunge to 2.2 percent from its current 4.66 percent.
"If they leave the fixed component alone, which I think they will, then the combination looks like 1.1 percent for the fixed rate and 1.1 percent for the inflation-adjusted component," Pederson says.
Pederson reached his conclusion after reviewing the government's Consumer Price Index data, which is used to determine the I bond rate.
Continued below
The current I bond has an inflation component of 3.56 percent. The latest CPI analysis pegs inflation at about 2.3 percent.
Pederson advises investors who are sitting on the fence, hoping the November I bond price will be higher, to jump in and buy now.
"The strategy would be to buy before Nov. 1. You receive the current I bond rate of 4.66 percent for the first six months. Then you get the rate published Nov. 1 for the second six-month period. If that rate is 2.2 percent, then for the year, you'll average 3.43 percent.
"If you decide to get out after a year and give up three months of interest, after the penalty you'll still net 2.57 percent. That's more than double what most money market funds are paying right now, and the interest is exempt from state and local taxes."
On the other hand, if you wait until after Nov. 1 to buy an I bond, Pederson says you'll likely get 2.2 percent for the first six months and then an unknown rate for the second period. You can't predict what the full return will be.
-- posted by KLR
» duggi - Re: Re: Re: U.S. AUGUST CPI UP 2.2% OVER 12 MONTHS
In response to message posted by KLR:KLR,
I agree with Pederson's assessment of return on I Bonds bought before the November 1st, except for the penalty part. My understanding is if you redeemed after a year you're penalized the LAST 3 months of interest. In this case it would be 3 months at the 2.2% rate, a 0.55% penalty. So 3.43 - 0.55 would give you a 2.88% yield. Not too shabby for 1 year money.
-- posted by duggi
» mtpirate - Re: Re: Re: U.S. AUGUST CPI UP 2.2% OVER 12 MONTHS
In response to message posted by KLR:Thanks to all for the great info.
KLR, thank you for sharing the info from Dan Pederson. I'm not sure I understand his math though. I calculate the projected rate as follows:
Assume fixed rate stays at 1.1%.
Assume CPI-U increase in Oct is same as Sept:
2003 05 183.30
2003 06 183.60
2003 07 183.90
2003 08 184.50
2003 09 185.00
2003 10 185.50 (e)
% increase: (185.5-183.3)/183.3 = .012002
Fixed rate = 1.10%
Inflation rate = 1.02%
Composite rate = [Fixed rate + 2 x Inflation rate + (Inflation rate X Fixed rate)] X 100%
Composite rate = [0.0110 + 2 x 0.012 + (0.012 X 0.0110)]
Composite rate = [0.0110 + 0.024 + 0.000132]
Composite rate = [0.035132]
Composite rate = 0.0351
Composite rate = 3.51%
While this is not great, it is better than the 5 Year Treasury at 3.127%, not as good as the best 5 year CD I can find: 4.27% from Capital One. My state tax rate of 8% knocks the CD yield down to 3.92%. Given the small spread between the Ibond and the CD, plus the small penalty for bailing within 5 years, I would probably favor the Ibond for my 5 year time horizon cash.
I did not know that a purchase before November 1 would have a rate of 4.66% for the period between Nov 1 03 and May 1 03. Can anyone provide the link to official word on that?
Thanks.
Scott
-- posted by mtpirate
» duggi - Re: Re: Re: Re: U.S. AUGUST CPI UP 2.2% OVER 12 MONTHS
In response to message posted by mtpirate:mtpirate,
The inflation rate the treasury uses in that formula is a semiannual one based on the CPI-U comparison of this September to last March which was 185.2 vs 184.2.
185.2 -184.2 =1
1/184.2 = 0.0054
So if you redo the math you'll find you get a composite rate of around 2.19%
If you buy prior to Nov 1st you will get six months at 4.66% from October through April 04, then 2.19% for the subsequent 6 months.
This link explains it.
-- posted by duggi
» radiodude - NEW I-BOND RATES: 2.19% down from 4.66%
From the Treasury: I Bonds: 2.19%, down from 4.66%
EE Bonds: 2.61%, down from 2.66%
Wow, EE-bonds are higher than I-bonds!!!
From: http://www.treasurydirect.gov/ (look at right side of screen)
-- posted by radiodude
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