T-bonds... what do you think?





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Discus: College Confidential Café: 2004 Archive: T-bonds... what do you think?
By Delfin (Delfin) on Friday, August 06, 2004 - 01:04 am: Edit

My parents aren't saavy investors, they think that CDs are the way to go, but I know that you basically lose money on those due to inflation. So I'm looking for some better options that are still safe.

So far T-bills, T-bonds, etc... are looking pretty good. From what I've read so far, the US gov is the most reliable borrower in the world (never defaulted), and they even offer inflation-protected securities.

Here's what caught my eye:
a $10,000 T-Bill may be sold for $9,500. In this case, the interest would be $500. The investor will receive $10,000 when the bill matures.

That $500 is 5% interest, better than any CD/savings account interest I've seen these days. (Yeah, the example didn't state a time frame.)

Here are some of the links I've been reading:
http://bonds.yahoo.com/ir_bd2.html
http://www.treasurydirect.gov/indiv/research/indepth/tbills/res_tbill_rates.htm

So my question is, do you guys think T-bills and such are a good way for a 17 year old with about $3000 to invest?

Any comments/criticisms/advice welcomed.

By Achat (Achat) on Friday, August 06, 2004 - 08:05 am: Edit

Well, the maturity date is 26 months and you can reinvest automatically, so if you are risk-averse, this is a good way to invest. When you do redeem them, find out if there is any cost associated with it, although I think not. If you redeem before the 26 months there is a cost.

You can also look into TIPS (inflation adjusted t-bill) which have 5 year maturity if you want to put it away for 5 years.

By Achat (Achat) on Friday, August 06, 2004 - 08:31 am: Edit

And I-bonds as well for inflation adjusted savings. But look into how you can sell them as well. If it is a matter of the principal being deposited into your account, that is fine.

By Achat (Achat) on Friday, August 06, 2004 - 08:39 am: Edit

Also look at the thread 'what to do with money' on the parents forum.

By Idler (Idler) on Monday, August 09, 2004 - 11:14 am: Edit

As a general rule, risk and reward (investment return) are proportional: if the return is greater, it means the market has evaluated the risk and found it greater.

By Shyboy13 (Shyboy13) on Monday, August 09, 2004 - 05:05 pm: Edit

The main problem I see with investing such a small amount is the transaction costs. It costs money to invest so sometimes you can actually have a negative return even though your investment actually did well. In the case of $3000, it may be best to get a CD unless you can find a way to put it to work for minimal transaction costs.

By Ndbisme5 (Ndbisme5) on Wednesday, August 11, 2004 - 11:24 am: Edit

Since they aren't experienced investors, I would go for some ole regular savings bonds. How much money are they planning on investing? If they are very conservative spenders and aren't interested in the stock market, be safe with savings bonds...even if the return isn't so big. Treasury bills and other investments are pretty complicated for newbies.

By Massdad (Massdad) on Wednesday, August 11, 2004 - 12:04 pm: Edit

This is a complex topic, far more complicated than what can be reasonably handled here. I suggest, as a start, heading to your local library and reading some personal finance books. Not the "make 10 million by age 25" type books, but the more serious ones. A decent librarian could help you.

w/r/t bonds, some things to think about:

- default risk. Only government and government backed securities have no default risk. With their safety, they pay lower interest.

- interest rate risk. For reasons far too complex to discuss here, the longer the period to maturity, the greater risk to your principal. When interest rates rise, the value of your bond goes down. If you hold to maturity, this is not a problem. If you hold for a shorter period, it is.

- as others mentioned, risk/reward trade off. The higher the risk, the higher the reward or interest rate.

- liquidity. Some bonds are not that easy to trade.

treasury direct is a good program if those are the products you want.


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