Magazine article Medical Economics

The Latest Twist on Savings Bonds

Magazine article Medical Economics

The Latest Twist on Savings Bonds

Article excerpt

Beginning this month, the US government will issue savings bonds whose value will be tied to the rate of inflation.

The bonds, known as Series I bonds, are similar to the inflation-indexed Treasury securities that debuted early last year. These 30-year bonds earn a set interest rate until maturity, which is usually lower than the rate of nonindexed bonds. But, unlike the Treasury securities, Series I bonds don't distribute interest payments until they mature or are redeemed. As a result, their inflation adjustment is a combination of the fixed interest rate and inflation rate.

If inflation is 2 percent, for example, a $1,000 Series I bond with a fixed interest rate of 3 percent will increase in value about 5 percent, to $1,050. Since the inflation adjustments are made twice a year-every May and November-the actual increase will be half that, or 2.5 percent, to $1,025.

If the country experiences 2 percent deflation, the same bond will increase in value by 1 percent (3 percent fixed rate minus 2 percent deflation), or 0. …

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