If you're using I-Bonds to protect yourself from inflation, you know it can get tricky.
Series I-Bonds are Treasury-backed bonds designed to help protect investors from inflation. Like most Treasury bonds, they appeal to investors seeking the security of an investment backed by the full faith and credit of the U.S. government. This, they are popular bond investing choices among seniors and retirees. They also have some tax advantages: You can defer reporting accumulated interest for federal income tax purposes until you redeem the bonds, or until the bonds stop earning interest 30 years from their issue date. (Of course, in exchange for greater security, they offer lower potential returns than some other investments.)
I-Bonds seem simple. They're sold at face value, and when you cash in the bonds, you receive interest. But there are intricacies, mostly because of how I-Bonds pay interest. I-Bond interest rates have two parts: A fixed rate that remains the same throughout the life of the bond, and a variable rate that is adjusted for inflation. The fixed rate is determined every six months, at the beginning of May and November, and applies to all I-Bonds issued in the following six months. For example, the fixed rate set on November 1, 2006, applies to all I-Bonds issued from November 2006 through April 2007.
The variable rate is based on the change in the consumer price index for all urban consumers (CPI-U) over a six-month period. Again, rates are determined at the beginning of May and November. The result is called the "composite earnings" rate. For May 2007 through October 2007, it was 1.30%. But that, again, is subject to change, as the chart below illustrates.
Historical I-Bonds rates
I-Bond fixed rates are determined each May 1 and November 1. Each fixed rate applies to all I-Bonds issued in the six months following the rate determination.
DATE FIXED RATES*
MAY 1, 2007 1.30%
MAY 1, 2006 1.40%
MAY 1, 2005 1.20%
MAY 1, 2004 1.00%
MAY 1, 2003 1.10%
MAY 1, 2002 2.00%
MAY 1, 2001 3.00%
MAY 1, 2000 3.60%
MAY 1, 1999 3.30%
*Annual rates compounded semiannually
Source: US Treasury Department, as of October 2006
You can buy I-Bonds at most financial institutions. The minimum purchase is $50 for purchasing paper bond certificates and $25 when purchasing electronically. The maximum amount you can buy for any calendar year is $60,000: $30,000 in paper bonds and $30,000 electronically. And you can redeem the bonds at any time after a 12-month minimum holding period--although, if you redeem them before five years, you'll lose your last three months of interest.
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