Series I savings bond
Series I Savings Bond
In the United States, a savings bond with either a fixed interest rate or an inflation-indexed interest rate. The inflation-indexed version pays a fixed amount plus an amount adjusted every six months according to the Consumer Price Index. For both types of Series I bonds, the interest rate is announced twice annually. These bonds are sold at face value and pay par upon maturity, which is 30 years after purchase. Series I bonds not held for at least five years are subject to a redemption penalty. Federal taxes on interest are deferred until redemption or maturity. Savings bonds are non-transferable and must either be held or redeemed.
Series I savings bond
A nonnegotiable U.S. Treasury obligation that pays semiannual interest based on a combination of a fixed rate established by the Treasury and the semiannual inflation rate as measured by changes in the Consumer Price Index. Series I bonds are issued at face value in amounts that range from $50 to $10,000. The bonds have a maturity of 30 years but may be redeemed beginning 6 months after issuance. See also Treasury Inflation-Protected Securities.
Case Study U.S. savings bonds, normally considered very conservative investments offering substandard returns, occasionally rise to the surface as a smart investment choice. This occurred in October 2001 following a yearlong Federal Reserve campaign to drive down short-term interest rates in order to help revive the sluggish economy. The Fed push for lower interest rates continued following the September 11 economic disruptions caused by the terrorist attacks on New York City and Washington, D.C. With savings accounts paying an annual return of 1% to 2%, money market funds yielding less than 3%, and certificates of deposit offering annual returns of 3% to 4%, investors seeking liquidity, safety, and income found an alternative in Series I savings bonds. Series I savings bonds are issued at face value and pay a composite return composed of a fixed rate and an inflation rate. Interest accrues monthly and compounds annually. The fixed rate established each May and November applies to all Series I bonds issued during the subsequent six months and remains unchanged for the life of those bonds. The inflation rate is subject to change twice a year for both new and outstanding bonds. In other words, buy a Series I bond and the fixed component is determined for the life of the bond but the inflation component is likely to change every six months. Series I bonds were a good investment in October 2001 because the fixed component had been established five months prior, when short-term rates were considerably higher. Series I bonds purchased during the month earned a current rate of 5.92%, substantially higher than could be earned from money market funds, certificates of deposit, and U.S. Treasury bills. The inflation component would subsequently decline, but the fixed rate had been established at 3% in May and would remain unchanged on all bonds issued prior to November 1. Thus, the combination of the fixed and the inflation segments offered investors a higher return than could be earned on alternative investments of equal safety. Series I bonds have a maturity of 30 years but can be redeemed 6 months after the issue date. Redemptions prior to 5 years incur a penalty of the most-recent 3 months' interest; redemptions after 5 years incur no penalty.