Sunday, December 11, 2005

The Bonds That Fight the Monster Called Inflation - New York Times

Another interesting article NY Times article that is useful for introductory investment (or money and banking) classes.

The Bonds That Fight the Monster Called Inflation - New York Times:
"The I Bonds offer a two-part interest-rate mechanism. The first is a fixed rate for the life of the bond. That rate is now 1 percent, applying to all I Bonds issued in the six months that started Nov. 1. The second rate is linked to the Consumer Price Index for urban consumers. This rate is reset twice a year - on Nov. 1 and May 1 - according to changes in the C.P.I.-U. It is this feature that has made the I Bond especially attractive to many fixed-income investors....On Nov. 1, the Treasury Department increased the variable I Bond rate to 5.70 percent - based on the climb in the inflation index from March to September - giving it a total annualized earnings rate of 6.73 percent.

"....And the rate looks even better when you consider that many observers...think that the C.P.I. overstates the real level of inflation in the economy."

1 comment:

Karthik Narayanaswamy said...

CPI overestimates effects of inflation? I have read criticism that the CPI underestimates the true impacts of inflation. Also, any idea how the relevant CPI (urban price index) compares with the traditional CPI and core CPI, in terms of impacts of energy and food prices?