I Bonds are geared to conservative investors interested in safety, capital appreciation, tax savings, and a hedge against inflation. With their small denominations, they are ideal for small individual investors. I Bonds would not be attractive to investors looking for income or aggressive investors looking for capital appreciation.
The rate of return offered by I bonds is not particularly attractive, although the tax benefits and inflating protection help compensate for the lower rate. Like Series EE savings bonds, I bonds tend to pay a lower rate than corporate and U.S. Treasury bonds.
The return from I bonds can be higher or lower than Series EE bonds, depending on a number of factors, including the rate of inflation and market interest rates. The rate for I bonds is adjusted for inflation every six months. The rate is set through a rather complex calculation. Series I bonds accrue earnings based on a combination of the fixed interest rate and the semiannual inflation rate.The government announces the composite rate each May and November.
The return offered by I bonds would be very low during periods of low inflation or deflation because negative as well as positive changes in the CPI-U are used to calculate composite rates. In fact, the return could fall to 0 percent during a deflationary period. If deflation were such that it more than fully offset the fixed rate of return and produced a negative composite rates, the government would not reduce the composite rate below zero. In this event, the redemption value of a Series I bond would remain constant through the period and become the base for calculating earnings that might accrue during the subsequent period.
Because I bonds were first issued in 1998, it is impossible to provide a long-term comparison between their rate of return and the return from stocks. But other U.S. savings bonds have trailed the stock market averages dramatically over the long-term. For the long-term, U.S. savings bond have provided about a 4.8 percent per year return compared with a 10.7 percent average annual return for stocks.
Interest on I bonds does not begin to accrue until the fourth month after the bond is issued. Then it accrues on the first day of each month. The redemption value of a bond does not change between accrual dates. A Series I bond may be redeemed beginning 12 months after it's issued. Interest is paid when the bonds are redeemed. If an I bond is redeemed less than five years after the date of issue, the overall earning period from the date of issue will be reduced by three months.
There are almost no risks associated with owning I bonds. Like all U.S. Savings Bonds, they are almost as safe as cash itself because they are backed by the full faith and credit of the federal government.
