Monday, June 13, 2005

Buying I Bond

Considering the interested rate offered by banks is so low, I keep wondering where to stack my short term investing money.

I Bond
sounds a reasonable alternative to me. The current I Bond rate is 4.8%, not bad. The minimum holding period for I Bond is 1 year. The catch is that if I sell them before 5 years, I will have to forfeit 3 most recent months' interest. I did a simple calculation, imagine I sell them just after 1 year. What is the rate I will get? Around 3.6%. According to, the best one year CD rate is around 4.0%. Since I won't need to pay state and local taxes for I Bond interest, they are pretty much the same. (I am using 10% state and local tax rate, YMMV).

I Bond does offer some other benefits. Its interest is tax-deferred; I don't need to pay taxes until I sell them; It is backed by U.S. Government instead of some unknown financial institute. Also its rate is adjusted twice a year based on inflation rate. It could offer a better rate eventually because Mr. Greenspan is going to keep raising interest rate.


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