April 2, 2006 in Business

Bonds are safe, and drawing more interest

Universal Press Syndicate The Spokesman-Review
 

If you’re looking for safe, slow growth, consider U.S. savings bonds. Some even offer inflation-adjusted returns. In a nutshell:

I Bonds. The “I” stands for “inflation,” because the return on an I Bond is a combination of a fixed rate (established at the time of purchase) and a floating rate that is adjusted every six months based on the Consumer Price Index for urban users (CPI-U). The most recent total rate is 6.73 percent.

Series EE Bonds. The interest rate on EE savings bonds is fixed for its 30-year duration at 90 percent of the average five-year Treasury security yields for the preceding six months. The rate for new purchases is adjusted every six months. Paper EE bonds are purchased at half their face value (e.g., you pay $50 for a $100 bond) and are guaranteed to double in value no later than 20 years from the issue date, offering at least a 3.5 percent average annual return. (Note that many other options, such as CDs, top that these days.)

Series HH Bonds. These bonds are no longer being issued.

Treasury Inflation-Protected Securities (TIPS). These, like I Bonds, offer some protection against inflation. The interest rate on TIPS stays the same, but the underlying principal is adjusted to keep up with inflation. If it’s increased, your semi-annual interest payments on it will also increase.

Though there are many differences among the aforementioned investments, they have some favorable characteristics in common: They’re issued by the U.S. government, so they’re pretty safe. They’re exempt from state and local taxes. (EE and I Bonds have the additional tax advantages of tax-deferral, and can be tax-free — if, for example, they’re used for qualified higher-education expenses.) They can be purchased commission-free at www.treasurydirect.gov.

There’s a lot more to learn about savings bonds before you invest. (For example, you don’t have to hold 30-year bonds for all 30 years, and bond mutual funds are also available.) Start at the horse’s mouth: www.savingsbonds.gov and www.publicdebt.treas.gov. For info on CDs and money market accounts, drop by www.fool.com/savings/ savings.htm.

Ask the Fool

Q: What can annual reports tell average, unsophisticated shareholders? Do they give intrinsic and market values? — R.B., Vail, Colo.

A: A company’s current market value can be found anytime, most easily via online stock quotes. Just click over to http://finance.yahoo.com, for example, and look for “market capitalization” (or “market cap”), which you can also calculate yourself by multiplying the current stock price by the number of shares outstanding. A company’s intrinsic, or fair, value is a more elusive beast. Different analysts will come up with different numbers, using different assumptions about the firm’s growth prospects, among other things.

Annual reports can serve all investors. If you’re a novice, read the CEO’s letter to shareholders, which gives a sense of what direction the company is headed in, as well as how candid the CEO is. Even the intimidating financial statements can offer up useful information if you give them a chance. The balance sheet will show you the firm’s financial health, including its cash, money it owes, money owed it, etc. The income statement (sometimes called the statement of operations) shows sales and profits over a period of time, while the statement of cash flows will list all of the company’s cash inflows and outflows during the period.

Learn how to make more sense of financial statements, and your portfolio may thank you.

Q: How many mutual funds are there, and how many are stock funds? — O.B., Seattle

A: According to the Investment Company Institute, there are about 9,193 mutual funds in existence, roughly 5,196 of which are stock funds. No wonder it can be hard to find outstanding funds. (For more on mutual funds, visit www.fool.com/mutualfunds/ mutualfunds.htm or www.morningstar.com.)

My dumbest investment

When I had $4,000 to invest, I was going to put it all in graphics chip-maker NVIDIA. But I was hesitant, so I decided to put half of it in Krispy Kreme. NVIDIA is near where I bought it, but Krispy Kreme has plunged. Meanwhile, I wonder what would have happened if I’d bought stock in Microsoft in 1987 with the $2,500 I instead spent on a laptop. — C.K., Mount Pleasant, Pa.

The Fool Responds: First off, you’re smart to avoid putting too many eggs in one basket. You just picked a troublesome basket. You’re not alone, though. All investors make some mistakes. Indeed, both Krispy Kreme and NVIDIA were recommended in our Motley Fool Stock Advisor newsletter, though we’ve since recommended selling the doughnut maker.

Regarding Microsoft, your money would have grown by more than 8,000 percent, turning $2,500 into more than $200,000. That’s one expensive laptop!


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