The CPI-U numbers have finally been released after the delay caused by the government shutdown and we can begin to speculate on the next I-Bond Rate....
The Investor's Manifesto
The Investor's Manifesto will help you understand the nuts and bolts of executing a lifetime investment plan, including: how to survive dealing with the investment industry, the practical meaning of market efficiency, how much to save, and what vehicles to use to achieve financial security and freedom.
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
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.
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.
Page last modified 1/16/2012