No, I Bonds can't lose value. The interest rate cannot go below zero and the redemption value of your I bonds can't decline.
I Bond Cons
The initial rate is only guaranteed for the first six months of ownership. After that, the rate can fall, even to zero. One-year lockup. You can't get your money back at all the first year, so you shouldn't invest any funds you'll absolutely need anytime soon.
I bonds cannot be cashed for one year after purchase. If a bond is cashed in year two through five after purchase, the prior three months of interest are forfeited. There is no interest penalty for cashing in the bonds after five years.
I bonds can be a safe immediate-term savings vehicle, especially in inflationary times. I bonds offer benefits such as the security of being backed by the full faith and credit of the U.S. government, state and local tax-exemptions and federal tax exemptions when used to fund educational expenses.
I savings bonds earn interest monthly. Interest is compounded semiannually, meaning that every 6 months we apply the bond's interest rate to a new principal value. The new principal is the sum of the prior principal and the interest earned in the previous 6 months.
Series I bonds are considered low risk since they are backed by the full faith and credit of the U.S. government and their redemption value cannot decline. But with this safety comes a low return, comparable to that of a high-interest savings account or certificate of deposit (CD).
Right now, I bonds are an appealing investment because they offer the opportunity to earn a generous rate of return on an asset that's guaranteed not to lose value.
It has been a long time coming, but 2023 looks to be the year that bonds will be back in fashion with investors. After years of low yields followed by a brutal drop in prices during 2022, returns in the fixed income markets appear poised to rebound.
Bonds, especially bonds from governments and major companies, also tend to be a safe investment. They can also offer much higher return than savings accounts. In exchange for the higher return, you give up flexibility because you cannot redeem bonds at any time.
A survivor is named on the bond(s)
If you are the named co-owner or beneficiary who inherits the bond, you have different options for paper EE or I bonds and paper HH bonds. If only one person is named on the bond and that person has died, the bond belongs to that person's estate.
If you're looking to diversify your portfolio amid the sluggish stock market right now, you might consider Series I bonds as a safe long-term investment with a reliable return. For most people, long-term investing in low-cost index funds is the best path toward financial independence.
Backed by the U.S. Treasury, Series I savings bonds are considered a relatively safe way to see a high yield on your investments. However, keep in mind that you cannot simply sell the bond once the interest rate falls.
I bonds have never been popular due to low interest and low inflation rates. However, inflation has increased, making these safe bonds more attractive. The cap at $10,000 and the annual interest of $689 might not be worth the hassle of owning and keeping up with a separate account.
Beware of I bonds' drawbacks
The biggest red flag for short-term investors: You can't redeem these bonds for a year after you purchase them, and you'll owe a penalty equal to three months' interest if you cash out any time over the first five years of owning the bond.
Interest earned on I bonds is exempt from state and local taxation, but owners can also defer federal income tax on the accrued interest for up to 30 years.
When we compare the historical 6-month composite rates against 12-month Treasuries at the time we see that the 6-month I bond rate is an average of 0.31% lower. At an initial rate of 6.89%, buying an I bond in October gets roughly 2.1% more compared to the 4.76% 12-month treasury rate (December 13, 2022).
I-bonds help offset inflation
As of November 2022, you'll earn an interest rate of 6.89 percent. This rate will change again in May 2023. But before diving all in on I-bonds, speak with a financial adviser to understand future I-bond rate predictions and ensure it's a sound personal finance decision for you.
Generally speaking, if you want to earn more interest, you'll need to take on more risk — and for many retirees, that's not a good option, either. You can safely earn far more with I Bonds, a type of savings bond issued by the U.S. Treasury, and protect against future high inflation.
I bonds are a good cash investment because they're guaranteed and have tax-deferred, inflation-adjusted interest. They are also liquid after one year. You can buy up to $15,000 in I bonds per person, per calendar year—that's in electronic and paper I bonds.
The composite rate for I bonds issued from November 2022 through April 2023 is 6.89%.
Bonds are safer for a reason⎯ you can expect a lower return on your investment. Stocks, on the other hand, typically combine a certain amount of unpredictability in the short-term, with the potential for a better return on your investment.
Series I savings bonds — commonly known as I-bonds — currently offer an interest rate of 6.89%. While that's lower than the 9.62% they offered during the six months that ended November 1, it's still an attractive rate for savers who would otherwise be putting money into a savings account or CD.
The main way is to go online using TreasuryDirect.gov, and the I bonds bought through this website are digital. There's also an entirely separate way to purchase paper I bonds.
Sitting in cash also presents an opportunity cost as it forgoes potentially better investments. Bonds provide interest income that often meets or exceeds the rate of inflation, and with the potential for capital gains if bought at a discount.