Q. Because certificate of deposit rates are so low now, is it not a good investment to purchase U.S. Savings Bonds? In addition to paying over 6 percent, they are also tax-deferred. How does purchase of a savings bond compare to a regular CD compounding? A. Savings bonds are a good investment for many reasons, including safety and a minimum yield guarantee. But comparing them to a CD is not so easy.
The first problem is what kind of CD to use for comparison. In one way, savings bonds are like a six-month CD because their interest rate is adjusted every six months. In another way, they are more like a five-year CD because if you hold them less than five years, you pay an interest-rate penalty.
The second problem is that no one can predict interest rates. The current rate on EE savings bonds, in effect through Oct. 31, is 6.57 percent, down from 7.19 percent. The Treasury Department adjusts the rate every May 1 and Nov. 1 to 85 percent of the average market yield on five-year Treasury securities for the preceding six months.
That means savings bond rates come down more slowly when rates are going down and go up more slowly when rates are going up. The yield you get when you cash in your bond after at least five years is based on the average rate in effect during the holding period, or 6 percent, whichever is more.
The third problem is figuring out the value of the tax deferral on savings bond interest. I asked for an opinion from Lynn Hopewell, a financial adviser in Falls Church, Va., who has studied the subject.
"Any time the savings bond yield is higher than the CD yield, it's a slam dunk" in favor of the savings bond, he said.
But Hopewell said as a general rule of thumb, the advantage of tax deferral is eliminated when an immediately taxable investment alternative offers a yield 1 percentage point greater. He said tax deferral becomes more valuable as you move into higher tax brackets, higher investment yields and longer holding periods.
Q. How can I get in on the initial public offering of a stock?
A. Start by going to one or more of the brokerage firms underwriting a new issue that interests you, said Robert Mescal, an analyst for New Issues newsletter in Fort Lauderdale. He said you have the best chance of getting the stock if your brokerage firm is one of the underwriters and you are a particularly good customer.
A second approach is to go directly to the chief financial officer of a company going public and express your interest. Company officers who are selling shares as part of the offering may be willing to designate you as a buyer, Mescal said.
Be aware, however, that the typical new issue underperforms the stock market as a whole. If you don't get the stock you want as part of the initial offering, you may be able to buy it cheaper after the initial interest in the company has subsided.
Q. If I hire my daughter to babysit for her little brother this summer, can I claim the expense in figuring my child care credit?
A. Only if she is 19 or older and you do not claim her as a dependent on your tax return.
Helen Huntley writes about investing and markets for the St. Petersburg Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Questions should be sent to Helen Huntley, St. Petersburg Times, P.O. Box 1121, St. Petersburg 33731.