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Investora's In-Depth Look at U.S. Series I Bonds
10 months ago by Matteo Rossi

Your Ultimate Guide to U.S. Series I Bonds by Investora

Understanding various types of investment options is crucial to financial success. One such investment tool, which may not be as familiar to some, is the U.S. Series I Bond. In this guide, we at Investora take you through a comprehensive examination of what Series I Bonds are, how they function, the advantages they offer, and how to go about purchasing them.

Unraveling the U.S. Series I Bonds

U.S. Series I Bonds are unique government savings bonds bearing non-marketable and interest-yielding attributes. The chief allure of these bonds lies in their inherent protection against inflation due to the dual interest rates they offer: a fixed and an adjustable inflation rate that modifies biannually.

Here are some quick bullet points to summarize key features of Series I Bonds:

  • They are non-marketable and interest-bearing U.S. government savings bonds.
  • They offer inflation protection, safeguarding the investors' purchasing power.
  • They can't be traded in secondary markets.
  • They guarantee a fixed interest rate for the bond's life and an adjustable inflation rate biannually.
  • They come with a 30-year maturity, including an initial 20-year term and a 10-year extension.

Mechanism of Series I Bonds

The primary objective of Series I Bonds is to shield the investors from inflation's eroding effects. This is achieved by the bond's unique structuring, which involves a fixed interest rate that stays consistent throughout the bond's life, along with an inflation rate that alters every May and November. This strategy aligns with changes in the non-seasonally adjusted consumer price index (CPI-U).

Further, the fixed interest rate is predetermined by the Secretary of the Treasury and is made public twice a year, at the onset of May and November. This rate then applies to all Series I bonds issued over the next six months, compounded semiannually, and remains unaltered throughout the bond's lifespan.

An important consideration is that the interest paid on Series I bonds is dynamic and varies over time, which can make it challenging to predict the bond's value in the future.

Computing the Series I Bonds Rates

The composite rate of the bond, which is essentially the actual rate, is derived by amalgamating the fixed rate and the inflation rate. However, the bond's interest rate has a floor limit of zero, imposed by the Treasury. This means that if the inflation rate is so negative that it overcompensates the fixed rate, the composite rate will be adjusted to zero. Here's how the composite rate is calculated:

Composite rate = fixed rate + (2 x semiannual inflation rate) + (fixed rate x semiannual inflation rate)

For instance, suppose the fixed rate is 0.30% and the semiannual inflation rate is -2.30%. In that case, the composite rate will equate to -4.31%. But given the negative value, the composite ratio will be modified to 0%.

Special Factors to Consider

Series I Bonds are viewed as a low-risk venture, thanks to the backing by the U.S. government, which ensures that their redemption value does not decline. Consequently, the returns on these bonds are similar to those from high-interest savings accounts or certificates of deposit (CD).

The Series I Bonds offer flexibility in terms of investment amounts, ranging from a minimum of $25 to a maximum of $10,000 annually per Social Security number. They can be held from as brief as a year to as long as 30 years. However, selling them within five years results in the loss of the last three months interest.

Moreover, a particularly appealing feature of the I bond is its tax benefits. If the bond's proceeds are utilized to fund higher education, the interest becomes exempt from federal income tax.

Acquiring Series I Bonds

You can obtain Series I bonds in two ways - either through the Treasury Direct website after creating an account or using your income tax refund. In the latter case, you may purchase paper certificates with a minimum value of $50.

Interest Income from Series I Bonds

The interest income from Series I bonds is taxable federally but exempt at state and local levels. The Series I Bond is a zero-coupon bond, implying that the interest is added back to the bond value and accrues interest on interest. The bondholder can choose between two taxation methods - the cash method, which taxes at the point of bond redemption, or the accrual method, which imposes taxes on the accumulated interest each year.

In certain situations, the income from Series I bonds can be federally tax-free, especially when used to finance higher education.

Purchasing Series I Savings Bonds

To purchase U.S. savings bonds, including Series I bonds, visit the U.S. Treasury's TreasuryDirect website. In case of using your federal tax refund for the purchase, complete and submit the IRS Form 8888 along with your tax return. The IRS will then arrange for your bonds to be sent to you.

Historic Interest Rates for Series I U.S. Savings Bonds

The composite rate for I bonds issued between May 2022 and October 2022 was an impressive 9.62 percent. This rate is applicable for the first six months of bond ownership. A detailed table showing the historic fixed and variable components can be found on TrasuryDirect.gov website.

Maturity of Series I Bonds

Series I Bonds have a 30-year maturity period, encompassing an initial 20-year term followed by a 10-year extension. They are issued at face value, thereby making them a long-term, reliable investment option.

With a 30-year maturity period, Series I bonds are a long-term investment designed to protect your purchasing power over time.

Summary

As a secure, low-risk investment tool that provides protection against inflation, Series I bonds offer a viable option for many investors. Whether you're planning for long-term savings goals or looking to diversify your portfolio, understanding the mechanics of Series I bonds is an excellent step forward.

Armed with this knowledge, you are better equipped to make informed decisions and potentially enhance your investment strategy. As always, it's essential to carefully consider your financial circumstances and consult a financial advisor if necessary. Remember, the journey of investment is continuous, and every step counts towards your financial growth.


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Matteo Rossi
Matteo Rossi
Author

Matteo Rossi is a seasoned financial expert, proficient in areas of investment strategies, bonds, ETFs, and fundamental analysis. With over a decade in the financial sector, Matteo has developed a keen eye for determining the intrinsic value of securities and deciphering market trends. He specializes in offering sharp insights on bonds and ETFs, with a firm belief in long-term investing principles. Through Investora, he aspires to educate readers about creating a diverse investment portfolio that stands the test of time. Outside the financial realm, Matteo is a passionate classical music enthusiast and a committed advocate for environmental conservation.


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