U.s. Savings I – Bonds: How Good An Investment Are They And What Is The Risk?

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F.A.Q’s Concerning U.S. Savings Series I – Bonds

What Is A Bond? What Is An I – Bond?

In essense, a bond, according to Webster’s dictionary, is an interest-bearing certificate issued by a government or business promising to pay the holder a specified sum on a specified date. As far as U.S. Savings I – Bonds are concerned, they are a low-risk inflation-indexed loan which the investor or holder is making to the Federal government so it can function and pay it’s debt.

U.S. I – Bonds – Low-Risk, Liquid Investment.

And because they are inflation-protected, U.S. Savings I – Bonds, earn interest as long as one owns them. In this writer’s opinion, depending on the investor’s personal financial situation, they are good protection from inflation and are ideal for preserving principal. They virtually have no risk at all.

 How Much Interest Can One Earn on I – Bonds?

Interest rates depend on general economic conditions. As interest rates in general rise, so do the interest rates paid on savings bonds.

What Makes A Bond Fluctuate?

Interest rates. When interest rates go up, bond prices fall; and when interest rates fall, bond prices rise.

When Is The Best Time To Buy Bonds? When interest rates rise, bond prices tend to fall and the yield rises to match prevailing interest rates. It is this writer’s opinion that is when it’s usually a good time to buy, especially if one plans to hold them until maturity.

What Is Their Maturity Date?

I – Bonds and their counterpart, EE Patriot Bonds, mature in 30 years. Their value increases monthly, compounds semi-annually and is paid at maturity.

What Is The Minimum Purchase Amount?

Minimum purchase amount, online is $25.00. Paper bonds are $50.00.

How Does All This Work?

Suppose one buys an I – Bond in December. The fixed rate that was set in November will be the permanent fixed rate. For six months, whatever the inflation premium was set in November, the holder will receive. When June rolls around the inflation premium will be changed to whatever rate was established in May, but the permanent fixed rate will remain fixed.

Where Can They Be Purchased?

I – Bonds can be bought and redeemed at an employer’s payroll savings plan, or can be ordered online. Also, at financial institutions. The bonds can be bought in eight denominations: $50, $75, $100, $200, $500, $1,000, $5,000 and $10,000. When you buy them online through TreasuryDirect, a $25 denomination also is available. Investors may purchase up to $5,000 worth of paper I – Bonds per year per Social Security number. One may also purchase an additional $5,000 in electronic I – Bonds through TreasuryDirect.

**A new program called SmartExchangeSM allows TreasuryDirect account owners to convert their Series E, EE, and I paper savings bonds to electronic securities in a special Conversion Linked Account within their online account.

At A Glance

TreasuryDirect -This is the easiest, fastest way to buy Series I bonds. The bonds are issued directly in your TreasuryDirect account. No paper bonds are issued. One has access to one’s account 24 hours a day, 7 days a week. One can set up an automatic purchase schedule for as little as $25. A person can establish a Payroll Savings Plan.

Mail-in-Order for U.S. Savings Bonds – Rather than ordering a purchase form, one can now buy paper savings bonds by completing an online order form and mailing it to the address shown on the form.

Banks and Other Financial Institutions – The bond is printed to one’s instructions and mailed within 15 business days. The bond’s issue date reflects the date of purchase so that no interest is lost.

Internet Banking Systems – One can purchase paper bonds through online account access with many local financial institutions.

Payroll Savings Plan- One can buy I – Bonds througha Payroll Savings Plan.

What Tax Benefits do Savings Bonds Offer?

Savings bonds don’t pay periodic interest subject to income tax. Instead, they increase in value over the years. This means one can delay claiming the interest income until a person redeems the bonds (or until they mature, which is typically 30 years after issue). If a person doesn’t want to claim income now, but wouldn’t mind claiming it later, savings bonds can help. They are exempt from state and local income taxes and make a good investment.

Who Should Purchase I – Bonds?

Because they’re relatively safe, savings bonds don’t offer huge returns. It may be best to use savings bonds for situations where no risk to principal is desired. That’s especially important for retirees and other investors who need to protect their assets.

Some of I – Bond’s Best Features

They have no risk and are backed by the U.S. Treasury.

They’re flexible. They can be redeemed anytime between one and 30 years. There is one caveat: If redeemed prior to five years, the last three months’ interest will be lost.

One Can’t Lose Money. I – Bonds will never return less than you invested in them even if the country enters a prolonged period of deflation. One never loses the interest earned. Once again, they are very low risk.

Positive I Bond Features Outline

* The I – Bond is an inflation-indexed savings bond and is very low risk. It has a fixed rate of return plus an inflation premium which are adjusted every May and November by the Treasury Department.

* The permanent fixed rate assigned when the bond was bought is good for as long as the bond is held. The inflation premium ensures that one does not lose the purchasing power of the investment over time.

* They are transferable on the open market.

* Bonds are sold through competitive and noncompetitive bidding at auction.

* They pay fixed interest every six months until maturity.

* Bonds mature in 30 years.

* They are inflation-indexed bonds.

* They may be used to pay for college tuition and fees.

 I – Bonds Restriction

* They are Treasury securities that are payable only to the person to whom they are registered. This means that they can’t be re-sold.

* They can earn interest up to 30 years, although they can be cashed-in after one year – with a penalty. If is redeemed before five years, a three-month interest penalty is incurred.

Depending on each individual circumstances and situation, this writer believes that this sort of investment at this time would be a prudent one for those wishing to preserve capital safely. This investment vehicle is good for as long as the United States government is in existence, therefore the risk is almost nil.

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Sources:

(1) Investing basics, Ch. 3: The I bond http://www.bankrate.com/finance/cd/the-i-bond.aspx#ixzz188Nr01X1

(2) TreasuryDirect.gov, http://treasurydirect.gov

Authored by Beverly Anne Sanchez, 2010

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