Are I Bonds a Good Investment?

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Series I savings bonds are savings certificates issued by the U.S. Treasury. The biggest benefit of I bonds is the interest rate earned by the bonds is indexed for inflation. Series I bonds are a safe investment and a review of the bond features can help determine if they are a good match for your investment goals.

Investing Amounts

Series I bonds are a good choice for small investment amounts. Paper I bonds can be purchased with as little as $50 and the electronic version has a minimum investment amount of $25. Bonds could be purchased as part of a regular ongoing investment plan, buying a bond every two weeks or monthly. The maximum amount of I bonds an investor can buy in one year is $5,000 of paper bonds and $5,000 of electronic I bonds for a total of $10,000.

Tax Advantaged Interest Accrual

The interest a series I bond earns accrues to the value of the bond. This makes I bonds appropriate for an investor looking for value growth over time. An I bond also compounds the interest earnings, so the interest earns interest. An I bond earns interest every month and the interest is compounded semi-annually. The interest earned on an I bond is tax deferred. The bond owner pays not taxes on the interest until a bond is cashed in. I bond interest is also exempt from state income taxes.

Inflation Indexed Interest

A series I bond earns two types of interest. Each I bond earns a fixed rate which is based on the rate for new I bonds at the time of issue. The Treasury declares a new I bond fixed rate every six months, in May and November. A series I bond also earns interest based on an inflation factor declared by the Treasury. The inflation factor is adjusted every six months. For example, an I bond purchased in November 2009 earns a fixed rate of interest of 0.30 percent. From November 2010 to April 2011, the inflation interest rate was 0.74 percent for a total interest rate of 1.04 percent. In May 2011, the inflation interest rate was changed to 4.6 percent, so the I bond would earn 4.9 percent interest for the next 6 months.

Long Term Savings

Series I bonds are meant for long term savings. The bonds have an interest penalty if redeemed within the first five years after purchase. A series I bond will continue to earn interest for up to 30 years after issue. An investor with a long term savings goal can use I bonds as an inflation hedge with the safety of a U.S. government backed savings certificate.


About the Author

Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.

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