I was talking with my parents and they told me they have been buying 30 year EE bonds at
$100 every 2 months with an interest rate of
4%. Because it is an EE bond, it does not pay a monthly coupon. So if we look at a single bond they bought, they would get
$4 per year. Does it pay to buy the bond if we assume inflation is
2.5%? (I have seen a lot of equations use 2% as a moderate inflation rate. I am using 2.5% because it seem more realistic/robust)
($4/year * 30years) + $100 = $220 future value
(1 - 0.025) ^ 30 = 46.78% buying power in 30 years
So taking the
$220 of the future dollars and multiplying it by our inflation rate gives
$220 * 0.4678 = $102.93 which is a
2.93% return over 30 years, which in turn is a
-1 + (1 + 0.0293) ^ 1/30) annual rate of return on their investment which is worse than what some banks offer.
Is there something I'm missing, something I calculated wrong (like the bond value when it matures), or did I make a bad assumption? It looks like it isn't worth buying a bond unless the coupon/rate is close to double digits.
edit: As far as I know, my parents aren't using the money that is being paid out from the bond. It is sitting in an account and they plan on withdrawing the full amount when the bond matures. So every $4 they get they technically aren't reinvesting anywhere. They have never invested in the stock market besides their 401k contributions.
This question more pertains to pure bond overall return (after 30 years) vs savings vs inflation. No reinvestment for compounding.