For investors seeking to gain some inflation protection and to defer interest income, or for those who desire a small minimum investment, I Bonds offer advantages unavailable from other investments.

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What are I Bonds?

Series I Savings Bonds, or I Bonds, are a savings bond issued by the U.S. Treasury. The rate of an I Bond adjusts to track inflation and is guaranteed to never lose value.

First issued in 1998, Series I Savings Bonds (I bonds) are a type of savings bond sold by the US Treasury. I bonds are designed to guarantee a real rate of return, regardless of the markets or deflation. To do this, I bonds adjust their rate every 6 months to track changes in the level of inflation as measured by the CPI-U. Even in periods of deflation, I bonds protect your investment by never losing value. Since an I bond cannot lose value and they are backed by the US government, they are frequently chosen by investors over corporate or municipal bonds, which could default or lose value. With I bonds, you are able to protect your investment against inflation with the security of savings bonds.

I Bonds and Inflation

Unlike other investments that base their value on companies or government loans, I Bonds base their rate on the semi-annual change in inflation, which is tracked by the CPI-U metric. Inflation is the increase in price of goods and services while deflation represents a decrease in the price of the same goods and services. In periods of deflation, an I Bond will not lose value as the US Treasury has set a floor on the rate at 0%. As long as an I Bond has a fixed rate greater than zero, an I Bond will always increase in real value before taxes. Even if an I Bond has a fixed rate of zero, the bond will always retain value by matching the changes in inflation.

I Bond Terms

The US Treasury considers I bonds to be a long term investment. As such, there are several limitations on I bonds that must be considered when analyzing your financial goals. I bonds have a one year minimum hold time in which the bond can not be redeemed. Additionally, bonds are subject to a 3 month interest penalty if the bond is redeemed within 5 years of the issue date. Similar to other US Treasury Bonds, I bonds continue to earn interest for 30 years. After that time, the matured bond is worth the face value plus the interest collected over that time. View a quick comparison of I Bonds to EE Bonds and TIPS, or view in-depth I Bonds vs. EE Bonds comparison and I Bonds vs. CDs comparison.

Timeline of an I-Bond

I Bond Risk

If the recession continues, and if it's severe, you know these investments are safe; they're government-issued. And if inflation jumps, TIPS and I bonds will help you ride out the storm.

Henry K. Hebeler, developer of analyzenow.com

Unlike stocks, corporate bonds, or other equities, I bonds are low risk investments. The inflation component of the I Bond's rate protects the earning power of the bond against rises in inflation over time. Even in the event of deflation, I Bonds are guaranteed to not lose value. Because I bonds are backed by the federal government, risks associated with the issuer defaulting are extremely slim (if the government defaults, you have many more problems to worry about than your I bonds). The biggest risk associated with I bonds are primarily administrative, such as losing a paper bond or needing to re-issue a bond with a new owner. In these cases, there are forms available where the bond can be replaced or reissued. Overall, I bonds are a very low risk investment that will never lose value and carry tax advantages unlike other investment options.

I-Bonds and risk: Asset Risks


Page last modified 1/16/2012