I Bonds Defined

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Investing in I Bonds

Plenty of ways are available to invest your money but there can also be plenty of risk involved in doing so. One of the least risky methods of investing your money involves purchasing treasury bonds, which are securities directly sold and backed by the full faith and credit of the United States government.

I Bonds are a non-marketable security, which means that once you purchase an I Bond, you cannot sell it to someone else in a secondary market. I Bonds are registered in the names of the purchaser. They are often used to help finance an education, supplement retirement income or to give as a gift. I Bonds can now be purchased electronically through the official government sponsored website called TreasuryDirect. See How To Buy Savings Bonds Online.

Purchasing I Bonds Electronically

If you decide to purchase an I Bond electronically, the minimum amount is $25 and the maximum you can invest is $5000 per social security number each calendar year.

Paper I Bonds can be purchased through most banks, credit unions and financial institutions. They are typically offered in denominations of $50, $75, $100, $200, $500, $1000 and $5000. The investment will grow at an earning rate that is decided at the time of purchase, adjusted for inflation.

Interest Rate of I Bonds

The interest rate of I Bonds are determined by two separate factors - a variable interest rate and fixed interest rate. The variable interest rate is set based on the inflation rate and is re-set two times every year in May and November. The Consumer Price Index, or specifically, the non-seasonally adjusted U.S. City Average of All Items Consumer Price Index, determines the current inflation rate for I Bonds and is used to adjust your I Bonds interest rate.

The fixed interest rate is determined at the time the I Bonds are purchased.

For example, if you have I Bonds with a 1% fixed interest rate and the variable interest rate based on inflation is 2.5%, the total interest rate for your I Bonds will be 3.5% during that six-month period. Thus, I Bonds pay higher interest rates when inflation is higher and lower interest rates when inflation is low.

Cashing In I Bonds

I Bonds mature after 20 years, but can earn interest for up to 30 years. The interest continues to accrue over the life of the bond and when you redeem the bond, the interest is paid.

I Bonds cannot be redeemed or cashed-in during the first 12 months after purchase. Bonds redeemed after 12 months but prior to 5 years will incurr a penalty equal to the last three months’ interest. After five years, you can redeem I Bonds with no penalty.

The current I Bond interest rate for bonds purchased after November 1, 2008 is 5.64% until April 30, 2009. After that, the inflation rate component of the I Bond yield will be recaculated and set based on the new rate of inflation.

While the interest rate paid on I Bonds does fluctuate, the principal is safe and money can’t be lost through I Bonds, making them a safe, secure and profitable investment.