- I-Bonds are government savings bonds that benefit from the rising tendencies of inflation. The low denominations available allow those with little means to place their money in safe but lucrative investments. The fixed-rate component of each bond locks in the interest rate, while the adjustable-interest component allows for potential gains from the rising inflation rate.
- An I-Bond comes in denominations of 50; 75; 100; 200; 500; 1,000; 5,000 and 10,000. Although the maximum maturity term is 30 years, they can be redeemed after the first year. After five years, however, the three months interest penalty disappears. I-Bonds are either electronic or paper. Individuals can invest up to $5,000 in either type of bond, for a maximum investment of $10,000, $5,000 in electronically purchased bonds and $5,000 in paper bonds. In addition, couples can purchase up $20,000 in I-Bonds, $10,000 in each type.
- Created in 1998, I-Bonds were meant to be a way for small-time investors to put money on the bond market. Backed by the U.S. Treasury, I-Bonds are also a safe investment for beginner as well. At the time, inflation was at 4.66% and climbing. These bonds were not only a way to profit from the rise in inflation, but to protect a small portion of one's wealth from being devalued by that inflation.
- Although there are two components to an I-Bond, there is no guarantee of a high return. In the spring of 2008, the fixed rate for an I-Bond bought at the time fell to 0% after a series of Federal Reserve interest rate cuts. Inflation was over 4% at the time, but there was a fear that once inflation slowed, the bonds would be worthless. In the worst-case scenario, however, the interest rate for the bond could never fall below 0%. The investor can never lose his initial investment. Also, the fixed rate for an I-Bond does not change over the life of the bond, and the inflation-adjusted interest component only changes every 6 months. There are no other ways to alter interest rates on these bonds.
- There is still an important upside to owning these bonds: the tax benefits. I-Bonds are non-taxable for local and state tax laws. The federal government can tax them once redeemed; however, if the bonds proceeds are used to pay for college tuition and fees, then those proceeds are tax exempt. They are safe investments, because the most you could lose is the interest earned. I-Bonds are also manageable on the internet.
