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You and I bonds

Dear Harry: For many years, I invested about 80 percent of our assets in municipal bonds.

Daily News personal finance columnist Harry Gross
Daily News personal finance columnist Harry GrossRead more

DEAR HARRY: For many years, I invested about 80 percent of our assets in municipal bonds. When interest rates started to ratchet down, I left the money from redemptions and calls in money-market funds (yielding about .5 percent now). With interest rates still at rock bottom, I started looking for better rates. CDs don't give me much better deals than the MM funds. Corporate bonds are too risky for me. U.S. bonds are miserly, as well.

A friend suggested that I look into U.S. I bonds. I had heard of them, but never considered them because I was looking for tax-frees. I understand that they pay a pretty good yield and have some inflation protection. Can you give me some help here?

WHAT HARRY SAYS: Most ofcoursely. I bonds can be purchased electronically through a TreasuryDirect account. The interest earned is in two parts - a fixed rate and an inflation-adjusted rate. Right now the combined rate is 1.18 percent - not a blockbuster. And the interest earned is taxable. But it's the safest thing around with inflation protection. The interest is compounded semi-annually and the rate changes every six months. The bonds are due in 30 years, but may be redeemed early with some loss of interest in the first five years. The drawback is the limited amount you can buy. The restriction is $10,000 per year for each SS number. Some mutual funds deal in inflation-protected bonds, so there's another vehicle for investing. CDs are OK for short periods, even at their minuscule rates.

write to him at Daily News, 801 Market St., Philadelphia, PA 19107.