In 1998, the federal government introduced a new type of U.S. Savings Bond tied to the rate of inflation. The new bonds are known as "I Bonds," and, like Series EE bonds, they are easy to buy, and they are available in much smaller denominations than other types of bonds. You can buy an I bond for as little as $50. I Bonds do not pay interest, but rather appreciate in value until the bondholder cashes them in.
There are many similarities between Series EE bonds and I Bonds. For instance, the interest earned from I Bonds is exempt from state and local taxes. You can also get some additional tax savings if you use the bonds for education. Depending on your income, interest earned from the bond is either fully or partially exempt from federal taxes if you use it for college tuition for yourself or your children.
But unlike Series EE Bonds, I bonds are sold at face value, whereas Series EE Bonds are issued at 50 percent of face value. But like Series EE bonds, I bonds pay no current interest; instead you receive earnings from the bond when you redeem it.
I bonds are not limited to the length of their term. In fact, you can redeem them any time - from within 12 months of buying them to as long as 30 years later. After a savings bond reaches its original maturity, it automatically enters one or more extension periods, usually of 10 years' duration. I bonds stop earning interest when they reach final maturity, which is 30 years.
Like Series EE bonds, the interest rate paid on I bonds is not fixed. Instead, it is based on both a fixed base rate of return plus an adjustable semiannual inflation rate tied to the Consumer Price Index (CPI). The CPI is one way the government measures inflation. As consumer prices increase, so does the CPI. And as the CPI increases, so does the rate offered by I Bonds. Interest rates paid by I bonds are adjusted every six months. Although I Bonds tend to pay a lower rate than market rates offered by other types of bonds, the adjustable rate features assures you that your I bonds return will always outpace the rate of inflation.
