Friday, December 26, 2008

I Bonds or I Savings bonds vs. Certificates of Deposits

The other day I was wondering about long term investments , something with a horizon of 5-10 years and I came across I bonds or I saving bonds.
thanks to a friend who introduced to me these safe government protected investments.

According to ibonds.info "Bonds have a one year minimum hold time in which the bond can not be redeemed. Additionally, bonds are subject to a 3 month interest penalty if the bond is redeemed within 5 years of the issue date. Similar to other US Treasury Bonds, I Bonds continue to earn interest for 30 years. After that time, the matured bond is worth the face value plus the interest collected over that time."

The most logical comparison that arrives at one's mind is between a CD and an I-bond. How does an I bond differ from
a 5 year CD.
1. CD's rates are fixed for the entire duration of the term. I bonds are inflation protected and have 2 parts , one called the fixed rate which stays the same for the entire duration
of the bond and a variable value which is tied to the inflation core index
2. One can withdraw money from a CD even before one year with an associated penalty ofcourse but atleast its an option.
3. With most banks money withdrawn from a CD before maturity is subject to three to six months of interest. Money withdrawn
from an I bond after 1 year is subject to similar but not neccessarily same terms.
4. Current rate for an Ibond is 5.64 % which ofcourse can and will change in the next five years. CD has constant rates of maturity
5. CD is protected by FDIC values whereas Ibonds are backed by the government.
6. According to ibonds.info "The federal tax can even be waived if the bond is redeemed to pay for education costs." This definitely not the case with CDs.

I bonds rate are weighted more on the CPI or variable rate rather than the fixed part so one should typically not wait till fixed part is higher. Essentially these are inflation protected investments.

Interest accrued on I bonds is on the end of the month, so its advisable to invest towards the end of the month.

Please note that I have not compared I bonds to other available government bonds in this article. CDs are something that naturally occured to me and hence the
comparison.

Is this a safe longterm investment in this recession season?

4 comments:

jj-momscashblog said...

Hi Tapan, This is very useful information at a time when I happen to be looking into Bonds and CD's...do you have e.s.p.?? lol Thanks for somewhere for me to start reading info regarding bonds!!

Tapan said...

Hi JJ,
Thanks for the comment.
What is e.s.p?

TD

jj-momscashblog said...

Hi Tapan, ESP is extrasensory perception and is also known as having a sixth sense,precognition or knowing something that someone is thinking... does that help? The best I can do... Hope all is well with you and that you will have a prosperous New Year!

Dividend Tree said...

Tapan,

Investors also need to look into risk-of-time value of money when going for long term investing in CD/Savings/Bonds. Although capital is assured, the interest rates are so small, that at best, it just keeps up with average inflation over a period of time. So it is basically cash at disposal, rather than an investment. It may appear attractive in this economy, but one needs to have its own strategy for this asset class