Definition
A Series I Bond is a type of non-marketable, interest-bearing U.S. government savings bond that is designed to protect investors from inflation. The interest on these bonds consists of a fixed rate and an inflation rate that is based on the Consumer Price Index for Urban Consumers (CPI-U). These bonds can be redeemed after 12 months, but there may be a penalty of last three months’ interest if they are redeemed within the first five years.
Key Takeaways
- Series I Bonds are low risk, inflation-protected securities issued by the U.S. Department of the Treasury. They’re designed to protect the purchasing power of your investment by adjusting with inflation.
- The interest rate of Series I Bonds consist of a fixed rate and an inflation rate, which are combined to form a composite earnings rate. The inflation rate is adjusted every 6 months, protecting your investment from inflation.
- These bonds have a maturity period of 30 years, but they can be redeemed after one year. However, if you redeem them before 5 years, you lose the last 3 months of interest.
Importance
The finance term “Series I Bond” is important because it represents a type of savings bond issued by the U.S. Government that offers a safe and low-risk investment option for individuals.
The unique quality of Series I Bonds is their inflationary protection, as their interest rates are composed of a fixed rate and an inflation rate, adjusted semi-annually. This ensures that the individual’s investment keeps up with inflation, protecting the purchasing power of their money over time.
Furthermore, it’s accessible, as the minimum investment is low, and provides tax advantages, as the interest earned is exempt from state and local taxes and federal tax can be deferred until redemption or until the bond stops earning interest after 30 years. Therefore, Series I Bonds are a significant tool for conservative investors aiming for long-term savings and security against inflation.
Explanation
Series I Bonds, issued by the U.S. Department of Treasury, serve a critical role in protecting investors from inflation while providing a reasonable return on their investment.
These bonds are designed as a low-risk investment tool for individuals, designed to keep pace with inflation to ensure the real value of the invested capital does not erode over time. They are attractive to individuals looking to safeguard their money while earning a modest return, making them an excellent option for conservative investors.
The purpose of Series I Bonds extends to encouraging personal saving habits as well. They can be easily purchased by individuals through the Treasury Department in small increments, with a minimum investment of only $25, enabling small or infrequent savers to take part.
Because of their government backing, these bonds provide a level of security that is highly desirable in uncertain economic times, further underscoring their intended use as a safe, long-term savings vehicle.
Examples of Series I Bond
Education Funds: Parents investing in Series I bonds as a safe, low-risk method of saving for their children’s college education expenses. The principal is guaranteed and protected against inflation, making it an efficient way of building a college fund over time.
Retirement Savings: An elderly couple buying Series I bonds regularly as part of their retirement savings plan. The income from these bonds is tax-free if used for qualifying education expenses, making them a preferable option for retirees looking to safeguard their money and gain moderate returns.
Investment Portfolio Diversification: An investor includes Series I Bonds in their investment portfolio to bring balance and diversity. They use them as a hedge against inflation, as these bonds’ interest rate comprises a fixed rate and an inflation-adjusted rate. Hence, they make a good fit for long-term investment strategies.
FAQs on Series I Bond
What is a Series I Bond?
A Series I bond is a type of non-marketable, interest-bearing U.S. government savings bond that earns a combined fixed interest rate and adjustable inflation rate (measured by the Consumer Price Index for all Urban Consumers). The bond is meant to give the investor a return plus protection on their purchasing power. Most U.S. series I bonds have a term of 30 years.
How can I purchase a Series I Bond?
Series I Bonds can be purchased directly from the U.S. Treasury through the TreasuryDirect website. You can purchase them in increments from $25 to $10,000.
When do Series I bonds earn interest?
Series I Bonds earn interest from the first day of their issue month. They earn interest for up to 30 years. This interest is added to the bond monthly and is paid when you cash the bond.
Can you lose money on Series I bonds?
No, you cannot lose money on your investment in Series I Bonds. Although the interest rate can fluctuate, the Treasury guarantees that the redemption value of a Series I bond will never decrease—that is, Series I Bonds will not lose value.
Who can own a Series I Bond?
Most US residents, including minors, can own series I bonds. Entities like estates, trusts, corporations, partnerships, and similar types of entities can own a paper Series I bond which is obtained from a decedent’s estate. They can also be owned by employee benefit plans.
Related Entrepreneurship Terms
- Inflation-indexed securities
- Treasury bonds
- Electronic series I bond
- Interest rates
- Compound interest
Sources for More Information
- Treasury Direct: This is the official U.S. government’s website where you can learn about and purchase Series I Bonds directly.
- Investopedia: A comprehensive source for terms and articles about Series I Bonds and other forms of investment.
- Internal Revenue Service (IRS): The official website of the IRS provides tax information related to Series I Bonds.
- Charles Schwab: A brokerage firm’s website, where you can gain investing advice and insights about Series I Bonds.
