Series I Bonds are accrual-type securities issued by the U.S. Department of the Treasury. They are designed for investors seeking to protect the purchasing power of their investment while earning a guaranteed real rate of return. These bonds are sold at face value and their principal increases with inflation-indexed earnings for up to 30 years.
Earnings Rate Structure
Fixed Rate Component
The fixed rate of a Series I Bond is established by the U.S. Treasury and applies to the bond for its entire life. This rate is announced semi-annually in May and November, and remains constant for bonds purchased in the following six-month period. The fixed rate component offers a guaranteed minimum return on the investment, separate from the variable inflation adjustment.
Variable Semi-Annual Inflation Rate Component
The variable semi-annual inflation rate is determined by changes in the non-seasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U). This rate adjusts every six months to reflect inflation, ensuring the bond’s value keeps pace with rising prices.
The formula to compute the composite earnings rate is:
Purchasing and Redeeming Series I Bonds
Purchase Options
Series I Bonds can be purchased directly through TreasuryDirect accounts or through participating financial institutions, including banks and credit unions. The minimum purchase amount is typically $25 when buying electronically, with a maximum annual purchase limit per individual.
Redemption Rules
Interest accrues monthly and is compounded semi-annually. Bondholders can start cashing in their bonds one year after purchase; however, bonds redeemed within the first five years forfeit the last three months of interest. After five years, there is no penalty for redeeming the bonds. The maximum duration for holding a Series I Bond is 30 years.
Tax Considerations
Interest earned from Series I Bonds is subject to federal income tax but exempt from state and local taxes. Taxes can be reported annually or deferred until redemption, whichever suits the investor’s tax planning strategy.
Comparison with Treasury Inflation-Protected Securities (TIPS)
Both Series I Bonds and TIPS are designed to protect against inflation. While Series I Bonds have both a fixed and a variable inflation component, TIPS adjust both their principal and interest payments in response to inflation. TIPS are also marketable securities unlike Series I Bonds, which are non-marketable and must be held until redemption.
FAQs
What is the current fixed rate on Series I Bonds?
How often are interest payments made?
Are Series I Bonds a good investment?
Summary
Series I Bonds offer a unique combination of a guaranteed fixed rate of return and protection against inflation, making them a strong option for risk-averse investors. Their tax advantages, despite the limitation of redemption periods and purchase caps, further enhance their appeal. By linking returns to the CPI-U, these bonds ensure the purchasing power of the investment is maintained over time.
Related Term: Treasury Inflation-Protected Securities (TIPS)
See also [Treasury Inflation-Protected Securities (TIPS)], which offer a similar way to hedge against inflation but with different structural and market characteristics compared to Series I Bonds.
By understanding and leveraging Series I Bonds, investors can safeguard their financial future against inflationary pressures while enjoying the stability and security provided by government-backed securities.
