The United States government has been issuing I bonds for over 20 years and they are a terrific way to earn high interest rates, with minimal risk. If you were to buy one of these bonds today, your interest rate would be 9.62%, which is obviously a great deal more than any savings account pays today.
However, there are a number of important facts about these bonds to be aware of, the most notable is that you cannot buy more than $10,000 of these fixed-income securities annually.
The interest rates that these bonds have been paying are impressive, and of course, being backed by the U.S. Government, means there is zero risk to loss of principal, a hard thing to come by these days. In fact, from 1998 to today, the annual interest rates have ranged from a low of 9.62%, todays rate, to a high of 13.39%, which was the rate paid in 2000, according to the U.S. Treasury website.
Unique Interest Rate Structure
One of the unique aspects to these bonds, which mature after 30 years, is that there are two components to the interest rate paid. The first is a fixed rate assigned, the second is a rate that changes as inflation changes, which is set twice per year. The bonds are designed to pay more when inflation is increasing, which is helpful in today’s environment.
For example, if you bought an I Bond in May or later of this year, the fixed rate was 0% and the inflation rate for just six months was 4.81%. Interest is paid on these bonds twice per year. Since inception the fixed rate has ranged from 0% to a high of 3.6%, but regardless the composite rate of over 9% has been the historical rate paid since 1998. Here is a link to the full rate breakdown of rates paid.
Applications, Caveats and Risks
Despite there being a $10,000 limit per year on these bonds, there are many applications. The federal guarantee plus high interest paid makes for very compelling college funding applications and there are even tax breaks when the bond is used to pay for higher education. The interest rates paid are high from a historical perspective given they are principal-risk free. The interest compounds twice per year, and the value of the bond can never drop below what you bought them for.
There are caveats with these bonds, however. If you sell them prior to five years, you lose the last three months interest. You cannot cash these bonds in prior to 12 months after first buying them. Like all investments, there is opportunity risk in that there could be higher returning investments than these bonds, but again, you are limited to $10,000 of purchases per year.
Like any investment, prior to making a final decision, you should always consult your financial advisor who can map out the pros and cons relative to your very specific situation, needs, and goals.
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