Re: I series bonds versus CD

"mark" <[EMAIL PROTECTED]> wrote
> the I series and EE series bonds are now paying around 2.19 and 2.61 %
> respectively.
> the best for I series in the past has been around like 3.6% or so.
>
> but the bank CD (FDIC insured) are available for around 4%
> (compounded) interest rate when bought for 5 years.
>
> so why not go for the fixed CD instead ? i am reading posts in this
> newsgroup and I series seems to be rated very highly ? the fixed rate
> CD are FDIC insured so the risk factor can be said to be equal to the
> I series bonds ?

All good questions.

Re CDs:
Bankrate.com states the current average for five-year CDs is around 3.5%. I'd be
surprised to find many, if any, paying 4% tomorrow.

The 5-year CD locks your money up for five years, unless one wants to pay a big
penalty.

All the CD interest is taxable by federal and state governments.

Re I-bonds:
One may sell I-bonds anytime after a year from the purchase.

I-bond interest rates have exceeded 4% in the last two years. E.g. see
http://www.publicdebt.ustreas.gov/com/comi0503.htm  But more importantly, I-bond
interest rates are unlikely to go down, as interest rates are at rock bottom
now. They'll stay flat for five years or rise.

I-bond interest is exempt from state and local income tax.

If you hold the I-bond for one day past five years, you will not pay a 3-month
penalty on interest.

I-bonds keep earning interest after five years. So if you find you don't need
the money after five years, you can let it keep growing in the I-bond until a
"rainy day" arises.

The federal government offers a tax break on I-bond interest designated for
college tuition.

One may buy, hold, and redeem I-bonds online.

Overall:
Which is better depends on your needs, as you probably figured. If one can tie
up one's money for no more than about five years, then a mix is often the best
"gamble," rolling the dice that I-bond interest rates will rise. Or throw in
some high grade investment bonds, too. Or buy some 1-year CDs and "bet" that CD
rates will rise next year. Of course, if we're not talking about much money,
this may be hand-wringing over pennies.

Or if there's more to this five-year plan, laddering might be an option to
consider.

Good luck.