I Bonds: Treasuries with an Inflationary Kicker
There must be a touch of inflation in the air, since a few
clients have been calling with questions regarding I Bonds. With
the low inflationary environment of late, there hasn't been a
lot of press concerning I Bonds. But since we don't know what
evil lurks around the economic corner, it may be time to review
what these I Bonds are all about.
Think of I Bonds as Series EE bonds on steroids. Like Series EE
bonds, they are issued by the U.S. Treasury and can be purchased
at your local bank. Federal income taxes can also be deferred on
the interest they earn - for up to thirty years. Here the
similarity ends.
Unlike EE bonds that are sold at a discount from face value, I
Bonds are sold at face value. Currently, the face value of the
various denominations are $50, $75, $100, $200, $500, $1,000,
$5000, and $10,000. The government says that this should make it
easier to keep track of the growth of the bonds, and this is
important because the bonds not only carry a nominal fixed
yield, they also carry a variable semiannual inflation yield as
well.
Ok, let's slow down here a little.
First, in May and November of each year, the Treasury Department
announces the fixed rate of return for new bonds. These fixed
rates will continue for the life of the bond.
Also in May and November of each year, the semiannual inflation
rate is announced and this rate is added to the fixed rate until
the Treasury announces a new inflation rate 6 months later. The
semiannual rate itself is based on changes in the Consumer Price
Index for all Urban consumers.
Increases in value occur the first day of the month and interest
is compounded semiannually.
The bonds will earn interest for up to 30 years, but are
redeemable after just 12 months. However, if you do cash them in
during the first 5 years, there is a penalty equal to 3 months
earnings.
In person, you can purchase up to $30,000 of bonds annually.
But, because the government almost never does things in a
straightforward manner, you can purchase an additional $30,000
in I bonds by going through Treasury Direct.
Anyone with a valid Social Security Number can purchase I bonds,
and they can be registered in single or joint ownership.
Series EE bonds cannot be exchanged for I Bonds.
Finally, if you're like most Americans who have difficulty
naming the various visages on U.S. currency, you're probably
going to fair no better with the 8 Americans featured on the I
Bonds.
For the record, here's the list -
$50 - Helen Keller; $75 - Dr. Hector P. Garcia; $100 - Dr.
Martin Luther King, Jr; $200 - Chief Joseph - Nez Perce; $500 -
General George C. Marshall; $1,000 - Albert Einstein; $5,000 -
Marian Anderson; $10,000 - Spark Matsunaga,
Yeah, I know. I had to look up a couple myself.
If you have any questions or comments, Chip would love to hear
from you. You may contact him by email at
dahlkefinancial@sbcglobal.net. You may also contact him at the
Living Trust Network. Its web site is
http://www.livingtrustnetwork.com.
Copyright 2005. Living Trust Network, LLC. All Rights Reserved.