Saving Bonds Good for Investment
In the U.S.A., there are two popular types of saving bonds, the I series bonds and the EE series bonds. Both these bonds dole out a specific interest rate over the course of two years, with the interest being compounded on a semi-annual basis. However, that’s where the similirities end.
Series I bonds have the cost of their face value, with no guarantees to the specific value of the bond at any given time. The interest payment is comprised of two specific components: the non-variable interest payment and the variable interest payment. Both factors are based on the inflation index of the US economy. The most selling point of the I-bond is that they are protected against inflation risks, and moreover, should the inflation rate go up, the variable interest rate will follow suit.
Series EE bonds on the other hand usually cost the half of its face value. It pays out a fixed interest rate over 30 years. This may seem like an unproductive strategy but hold on. Series EE bonds are also guaranteed to double their value in 20 years, thus making the bond worth its face value. Supposing the interest rate of the bond is on the low end and cannot meet the doubled value within the twenty years, there will be a one-time payment added to the bond in question just to be able to meet the face value.
Choosing which is preferable depends on the circumstances and of course, inflation rate. If a double digit inflation hits the country, then being in the Series I bonds is a blessing, as it offers inflation protection. However, if interests rates are on the low end, the EE series is more dependable due to their guaranteed double value in the twentieth year.
Written by admin on April 14th, 2008 with
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