What is a Series I Bond?

A Series I Bond is a type of interest-bearing certificate that is issued by the United States government and is designed to protect the owner against inflation. A Series I bond is sold at face value, and it accrues interest until its date of maturity, a preset date at which the bond stops earning interest and can be redeemed for the original price plus any interest it has accrued since it was purchased. For Series I bonds, this date is 30 years after its purchase date. A series I bond also can be redeemed before it reaches maturity, but at least 12 months must have passed since it was purchased, and the holder will forfeit a certain amount of accrued interest by redeeming the bond within the first five years. After five years have passed since the bond was purchased, it can be redeemed for the full purchase amount, plus all of the interest it has accrued to that point.

The interest that Series I bonds earn is a combination of two different interest rates: the fixed rate and the inflation rate, or variable rate. The fixed rate is so named because it remains the same for the lifetime of the bond. A new fixed rate is announced each 1 May and 1 November, and it applies in perpetuity to all I bonds issued during the six-month period beginning with the announcement date. For instance, if the fixed rate is announced to be 0.5% on 1 May, any Series I bond purchased between 1 May and 1 November will always have a fixed rate of 0.5%, regardless of what the fixed rate might change to on 1 November of that year.

The inflation rate is also announced each 1 May and 1 November. This rate, however, applies to all Series I bonds for those six months, regardless of the date of purchase. The sum of these two rates determines the composite rate of the Series I bond, or the total interest that it is earning. The inflation rate changes every six months, so a Series I bond’s composite rate of interest will also change every six months, even though its fixed rate remains the same.

An appealing feature of the Series I bond is that it is guaranteed to never lose value or drop below 0% interest. If the economy undergoes a period of deflation and the variable rate drops below 0% in a given six-month period, the negative value will be subtracted from the bond’s fixed rate for that period, but it will never cause the composite interest rate to drop below 0%. For instance, if a bond’s fixed rate is 0.5% and the inflation rate for a given period is minus-1%, the bond’s composite interest for that period will be 0%, not minus-0.5%. In other words, depending on the current inflation rate, I bonds might stop earning interest during some periods, but it will never decrease in value.

Series I bonds can be purchased in denominations ranging from $50 US Dollars (USD) to $5,000 USD, and any citizen or civilian employee of the United States with a social security number is eligible to buy them. They can be owned by individuals, corporations, organizations and fiduciaries, and they are even purchasable by minors. The interest earned on Series I bonds is subject to federal income tax as well as other state and federal excise taxes. Income tax on Series I bonds can be deferred until they are redeemed or until they reach maturity.