Conference nyoss1::market_investing

(Reprinted without permission from Forbes, February 3, 1992)

"A Deal you Can't Refuse?"
by William Baldwin

" Buy US savings bonds.

The foregoing announcement is not presented as a public service.  Quite the
contrary;  the idea here is for you to enrich yourself slightly at the expense
of the public.

An unnoticed side effect of the collapse in interest rates is that it has turned
the Series EE savings bond into a bargain.  At any time, the US treasury could
correct the anomaly by cutting the minimum interest rate on the bond. Buy now
before the 6% window slams shut.

The series EE carries a variable interest rate, reset twice ayear at 0.85 times
the rate on marketable five-year treasury notes.  No bargain there.  But the EE
also has a minimum rate of 6% if you hold it for at least five years. Like the
notes, the savings bond compouns semiannually and is exempt from state and local
income tax.

Five-year treasury notes, as it happens, are now trading to yield exactly 6%.  
Two features make the EE a better buy.  one is that you report EE interest on
your federal tax return not when you earn it but when you feel like reporting
it.  The other is that the maturity of the EE is subject to your whim.

How much are those features worth?  It depends on future tax rates and future
interest rates.  But this will give you some ides. Assuming your federal tax
bracket is now 34% and doesn't change, then the right to defer reporting the
interest until you cash the bond in adds about 0.2 percentage points to your
aftertax annual yield, if you hold for five years.  The deferral is worth 0.9
percentage points of  aftertax yield if you hold for the maximum 30 years.

The variable maturity feature is potentially much more important.  Consider what
happened to last-minute buyers in an earlier savings bond stampede, which took
place in the fall of 1986.  At that time, the guaranteed minimum return on the
EE hovered at an appealing 7.5% even as market interest rates sank.  People who
put their money down before the minimum was slashed are sitting pretty now. 
Since they can cash in their bonds at any time, they have, in effect, a
zero-risk money market account, except that it pays 3 points more than ordinary
money markets.

If you were going to invest in medium-term treasurys anyhow, buy EEs instead. 
Hold for five years.  If, by that time, market interest rates have fallen
further, hang on to your EEs.  If rates have climbed, cash the bonds in and buy
marketable treasury notes.

Note that the variable rate fall-back coesn't do you much good.  Why not? 
Because this part of theformula is slanted in the treasury's favor.  You don't
get, for each six-month reset period, the greater of 6% a year or 0.85 times the
rate on notes.  Rather you get either 0.85 times average market rates over the
whole time you've held the EE, or, if it's greater, 6% over the whole time.

What if tax rates go up?  You're well protected.  Start out by declaring that
you intend to defer reporting interest until redemption.  If and when a tax hike
is enacted, switch to current reporting of your interest.  You will declare the
interest accumulated to that point on your next tax return, paying at your old
tax  rate.  It is highly unlikely that a rate hike would be made retroactive.

What if you need to cash in before five years?  Rates scale up, starting at 4.2%
for a six-month holding period.  That's more than you can earn on a six-month
treasury bill.  It's hard to lose with these EEs.

If you buy jointly with your spouse, the maximum amount you can put into EEs is
$30,000 a year.  This quantity will have a face value of $60,000, but the face
value of these bonds is an irrelevant concept.  (At 6%, your $30,000 investment
would turn into $60,000 in a little less than 12 years, but you may or may not
hold that long.)  The tax deferral survives the death of the first spouse.  Sole
owners are limited to a $15,000 investment per year.

An additional feature of EEs is that they become completely tax-exempt if
proceeds are used for a dependent's college tuition and the owner's income is
low in the year of redemption.  The tax exemption begins to phase out at $62,900
of adjusted gross income on a joint return.

A hard-to-beat investment in this environment.  Easiest place to buy the bonds: 
whichever bank has your checking account."

  For the latest rate call 1-800-USBONDS

  The mesage will give you the latest rate and is updated May 1 and Nov 1 to
reflect the current interest rate.

    They've changes the number to: 1-800-4US-BOND
    
    L.

    The 800-4USBOND number got me Kutchen & Kutchen ....
    
    I called the 617-973-3000 number; asked about the current value of
    old  savings bonds .. was treanferred .. and the nice lady their 
    would tell me the bonds value ... but since I have several .. she is
    going to send me a chart (presumabley on how to determine their
    current value).
    
    /Bob
    
    
    
    

    I stumbled across this in the DIGITAL conference...
    Does anyone know any of the particulars about this?
    
    Dave
    
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                        -< The Digital way of working >-
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Note 3510.25                     GATT Agreement                         25 of 26
PEAKS::LILAK "Who IS John Galt ?"                    27 lines  16-NOV-1994 15:50
                    -< If it is for free trade, why......? >-
--------------------------------------------------------------------------------
    As an ardent supported of free trade, I wonder why it has to be
    implemented by a layer of parasitic bureaucrats.
    
    I'm also suspicious of some of the 'amendments' that have been snuck
    into this treaty.
    
<section deleted>
    
    Section 745 extends authority to the government to renege on the terms
    of U.S. Savings bonds and set new return amounts.
    
    What's it got to do with trade ?
    
    Just a few questions.
    
    Publius

I have a couple of easy questions about series EE savings bonds:

I received a $50 face-value EE bond recently as part of some marketing
promotion. It was issued in February, 1994.

1. Is it true that I can cash it in because 6 months have elapsed since the
   issue date?

2. If I cashed it in, would I receive $25 plus interest?

3. How long would I have to keep it to receive $50 plus interest?

4. If I expect interest rates to continue rising (as I do), should I just hold
   on to it until I expect interest rates to stabilize?

Vicki Meagher

    The government is not going to reneg on the terms and conditions of the
    Savings Bonds it has already issued.
    
    The ammendment allows the Treasury to remove the floor on the interest
    payment (for current-issue bonds, 4%).  It also removes the tie to the 
    5-yr. bond (85% of the average 5-yr. bond rate, if held for 5 years); 
    and it substitutes a new tie more closely aligned with average short 
    term rates.
    
    Most importantly, the ammendment would have new-issue Savings Bonds
    only credit interest semi-annually, instead of the current monthly
    interest credit.  In simple terms, if you cashed in your bond on a 
    non-anniversary date, yuo would not get accrued interest.
    

    re: .-1
>>    The ammendment allows the Treasury to remove the floor on the interest
>>    payment (for current-issue bonds, 4%).  It also removes the tie to the 
>>    5-yr. bond (85% of the average 5-yr. bond rate, if held for 5 years); 
    
    I have purchased a lot of EE bonds over the last couple years. Part 
    of the reason they were attractive was due to the 4% floor for sales
    earlier than the 5 year mark. Does this ammendment allow them to 
    remove this floor on my already purchased bonds? 
    
    It was nice knowing I had a 4% guarenteed minimum by law, particularly
    since I didn't expect to hold on to them for 5 years; teen-ager nearing 
    college, better rates/terms than short-term CDs (redeemable after 6 mo.,
    monthly interest accrual, no state tax, no fed tax if for college)...
    
    Dave

    From what I've read -- and I don't get to see the actual bill under
    consideration by Congress -- existing bonds are not affected.
    
    So this would mean this month (or this week) is the last month (or week) 
    that one can purchase these bonds with the 4% floor, depending on when
    Congress passes the bill.  However, Sen. Helms (R., NC) has demanded
    that the GATT bill not be taken up until the next sesssion of Congress.
    Pres. Clinton wants action now.  We shall see who will prevail.
    
    BTW, the floor interest rate used to be 6% for Savings Bonds purchased 
    as late as early 1993.  Now that was a sweetheart of a deal, since
    during that period even T-bills didn't pay 6%.

    re: .9
    
    >BTW, the floor interest rate used to be 6% for Savings Bonds purchased 
    >as late as early 1993.  Now that was a sweetheart of a deal, since
    >during that period even T-bills didn't pay 6%.
    
    I think you're confusing the statutory minimum rate of 4% with the
    "floor interest rate" which applies to bonds held 5 years or more.
    
    Currently, they're both 4%, so cashing in a 6 month old bond provides a
    4% return. But, cashing in a bond from early 1993 (with the 6% floor)
    will still only provide a 4% return, because the bond wasn't held for 5
    years. (I'm ignoring the fact that the 4% rate slowly increases over
    the 5 years.)
    
    I agree they were a good deal. I bought some :)
    

    re: .10
    
    Yes, it was the 'statutory 4%' that made them attractive to me over 
    short-term CDs (plus the other aspects), because it's highly likely
    I'll be redeeming them before their 5 year mark. Will this ammendment 
    change/remove this statutory minumum?
    
    	Dave

    OK, now that GATT passed, here's where we stand.  A portion of the GATT
    bill allows the Treasury to abandon the traditional terms for Savings
    Bonds.  The bill specifically prohibits the Treasury from changing
    the terms of Savings Bonds already issued.
    
    Up to now, current-issue Savings Bonds are sold at a discount (half face
    value) and accrue interest at the following rates from the first day of 
    the month the bond was purchased:
    	0% -- if held less than six months
    	4% -- if held from six to sixty months; interest accrued monthly
        	max(4%, 85% of the average 5-yr. T-note rate) -- if held from 
    		sixty months to maturity [about 18 years at current rates];
    		interest accrued semi-annually
    	85% of the average 5-yr. T-note rate or whatever other rate the 
    		Treasury may decide at the time -- if held beyond maturity
    	0% -- if held more than 30 years
    
    Current practice is to publish the "85% averate rate" every May and
    November.  Your bank gets the circular.
    
    The interest accrual periods are important factors when you cash in your
    bond: you earn no interest from the last accrual point.
    
    Until the Treasury issues new regulations, it will continue to sell
    Savings Bonds under these terms.   However, it is now allowed to remove
    the statutory floor and the minimum rate (6-60 month period), modify the
    accrual periodicity, and even change the fixed interest rate to a variable
    one -- again, new bonds only.  Expect a change in early 1995. 

    0% after 30 years? Has this always been the case, or do old
    "grandfathered" bonds continue to accumulate from here to eternity? My
    mother probably has a few bonds older than that.
    
    I'd like to ask again the question raised by .5 : why was this an
    amendment to GATT? What has it to do with free trade? Perhaps it is
    another example of the congressional pastime of tacking unrelated
    amendments to legislation to get favorite issues or pork-barrel
    handouts passed, or to be able to blame the other party for voting
    against something (the amendment) if they vote down the main bill.
    
    Jim
    

    I would double-check with the Treasury for your mother's old bonds.
    
    Why was this provision in the GATT bill?  For that matter, why were
    there provisions lowering pension cash-out values in the GATT bill?
    I suspect they were there to effect a compromise between competing
    interests.  Massachusetts residents have seen this kind of compromise
    recently on the front pages: higher legislators' salaries coupled with
    a lowered capital gains tax.  As they say, politics is like making
    sausage .... 

    re: .12
    
>    Up to now, current-issue Savings Bonds are sold at a discount (half face
>    value) and accrue interest at the following rates from the first day of 
>    the month the bond was purchased:
>    	0% -- if held less than six months
>    	4% -- if held from six to sixty months; interest accrued monthly
>       max(4%, 85% of the average 5-yr. T-note rate) -- if held from 
>    		sixty months to maturity [about 18 years at current rates];
>    		interest accrued semi-annually
>    	85% of the average 5-yr. T-note rate or whatever other rate the 
>    		Treasury may decide at the time -- if held beyond maturity
>    	0% -- if held more than 30 years
    
    
    Isn't there some kind of sliding scale during the 6-60 month period?
    
    Dave

    oops - never mind... I just found the answer to my question.
    
    The sliding scale doesn't apply to bonds purchased after March 1993.
    
    Dave