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Is the Series I bond's "fixed rate" really fixed?

Dorothy Rosen -- The Dollar DivaDear Dollar Diva,
Regarding Series I savings bonds, is the "fixed rate" portion really fixed or can it go down to 0 percent?

If the economy tanks, and the U.S. finds itself in a serious deflationary period, the "fixed rate" portion of Series I savings bonds can go down to 0 percent. The U.S. hasn't seen that kind of deflation since The Great Depression of the early 1930s, and although anything can happen, the Diva doesn't expect a repeat performance any time soon.

In a growing economy, inflation becomes more of an issue -- prices go up and the value of a dollar goes down. By indexing interest rates to the Consumer Price Index-Urban (CPI-U), Series I bonds are designed to be a hedge against infla

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Visit the Federal Reserve Bank of Minneapolis Web site to track the U.S. annual inflation rates from 1913 to the present. You'll see an economy that's experienced moderate, steady growth since 1982. But the economy could change, and if you're worried about deflation, allocate some investment dollars to long-term Treasury bonds as a hedge against it.

Though long-term Treasury bonds are better than Series I bonds during a period of deflation, don't think I bonds are chopped liver. The I bond's redemption value doesn't change, so even if its interest rate goes down to 0 percent, you'll never actually lose purchasing power on it.

To illustrate this point, go to The Federal Reserve Bank of Minneapolis' calculator "What is a dollar worth" to compare the value of a dollar over two periods. It shows that you'd only need 76 cents in 1933 to buy the same things that would have cost $1 four years earlier, in 1929. The dollar bought more in 1933 because deflation caused prices to fall.

For a list of I bond rates since its inception, visit the U. S. Treasury's savings bond Web site. You'll also find a blow-by-blow description of how the rates are computed. Left-brained people will love it, but the Diva warns right-brainers to be careful: it's an algebraic formula that could have you clutching at your chest if you don't approach it with caution.

DOROTHY ROSEN has a master's degree in finance, with a specialization in accounting, from the Kellogg Graduate School at Northwestern University in Evanston, Ill. Rosen has more than 15 years of experience in the financial arena, serving in Illinois and Florida as a certified public accountant, financial consultant, expert witness and educator. She is owner of Dorothy Rosen, CPA, a public accounting firm that serves individuals and small businesses.

-- Updated: May 18, 2005




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