Government Bonds offer:
Drawbacks To Government Bonds:
Government bonds are an attractive method of investing money.
You basically lend a sum of money to the goverment and you are assured of
getting a fixed amount of interest plus full principal amount whenever
the bond is redeemed. You can also be assured that your money is safe
because chances that the government will fold are unlikely.
But, For anyone with a long-term investment goal, government bonds have
little appeal because they greatly underperform other readily available
investments, such as stocks and mutual funds.(5)
For example, bonds issued today pay interest at a variable rate equal to
90 percent of the average rate on five-year Treasury notes, Currently 5.68 percent.(5)
If this rate were to stay unchanged, today's bonds would reach face value
in about 12 years. Those who invest in other things, such as stocks, have
faired better.(5)
For example, according to Ibbotson Associates, the 500-stock index earned
an average of 10.7 percent annually.(5)
To invest my grandmother's money properly, my best bet would be to use
some of the money to invest in bonds. Afterall my principal is protected
and their safe because they're backed by the full faith and credit of the
U.S. government. My principal will be protected and they are free of state
and local income taxes and they allow for deferral of federal income taxes
until the bond is redeemed.(3)
But, since I am going to attend college I checked around and found out
some information about a type of government bond called Series EE bonds.
These bonds earn interest based on 5-year treasury security yields and
they increase in value every month instead of every six months. Interest
is compounded semiannually. For example, if I invested $5,000 of my
grandmothers money and cashed it in six years later, I would get my
origianl $5,000 back plus 72 months of interest(3)
The rates that are announced each May and November are the annual
rates that apply to my bond for the six-month earning periods. Best of all, These bonds
have a long life of earning interest for up to 30 years. For education
savings these bonds offer special tax benefits. If I qualify, I can
exclude all or part of the interest earned on Series EE bonds from income
when the bonds are redeemed to pay for post-secondary tuition and fees.(3)
Since I am planning to attend college, it would be wise to
invest in some money in this type of bond for all practical purposes.
Although government bonds offer lower rates, atleast I know my money is
safe and it is backed by the U.S. government.
Government Bond Information Links:
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