What Is a Series I Bond?
A series I bond is an interest-bearing, non-marketable savings bond that the US government issues that combines fixed interest rates with variable (semiannually adjusted) inflation rates. Series I bonds aim to provide investors with inflation protection and a return.
Most Series I bonds are issued online, although Treasury Direct states that you may use your income tax return to acquire physical certificates for at least $50.
Understanding Series I Bonds
The U.S. Treasury savings bond program includes non-marketable Series I bonds, intended to be low-risk investment options. Due to their non-marketability characteristics, they cannot be purchased or sold in secondary markets. A Series I bond yields two forms of interest: a fixed interest rate for the bond’s duration and an inflation rate modified every May and November in response to shifts in the non-seasonally adjusted consumer price index for all urban consumers (CPI-U).
The Secretary of the Treasury sets the fixed-rate portion of the Series I bond, which is disclosed every six months on the first business day of May and November. Then, during the bond’s duration, that fixed rate—compounded semiannually—is applied to all Series I bonds issued over the next six months.
As with the fixed interest rate, the inflation rate is set by adjustments to the Consumer Price Index (CPI), which is the primary indicator of inflation in the U.S. economy and is released twice a year in May and November. The bond is subject to an inflation rate adjustment every six months, starting on the date of issuance.
Since the interest paid on Series I bonds is unpredictable and fluctuates over time, it is difficult to predict the bonds’ value in the future.
Methods for Computing Series I Bonds
The fixed and inflation rates are combined to get the bond’s actual rate, sometimes called the composite rate. The rate of inflation impacts the fixed rate on the bond. On the other hand, the Treasury has set a floor of zero on Series I bonds, the lowest interest rate they can have. The composite rate will be zero if the inflation rate is so negative that it is lower than the fixed rate. The following is the formula for figuring out the composite rate:
Composite rate = fixed rate + (2 x semiannual inflation rate) + (fixed rate x semiannual inflation rate)
For example, if the fixed rate is 0.30% and the semiannual inflation is -2.30%, the composite rate on the bond will be:
- = 0.003 + (2 x -0.023) + (0.003 x -0.023)
- = 0.003 – 0.046 – 0.000069
- = -0.04307, or -4.31%.
However, since it is negative in this case, the composite ratio will be adjusted to 0%.
Nonetheless, the composite ratio will be changed to 0% since it is negative.
Special Considerations: Since the redemption value of Series I bonds is guaranteed by the complete confidence and credit of the United States government, they are regarded as low-risk investments. However, the modest return accompanying this protection is similar to that of a certificate of deposit (CD) or high-interest savings account. However, corporate and municipal bonds can potentially lose value; a larger yield offsets this risk.
Series I bonds may issue any sum between the minimum and maximum purchase requirements. The minimum and maximum yearly purchases for each Social Security number are $25 and $10,000, respectively. Series I bonds have a maximum holding period of 30 years, but if sold before that time, the holder forfeits the income earned during the previous three months.
Quick Fact
The interest on an I bond is not subject to federal income tax if sold, and the money raised is used to fund postsecondary education.
Interest Income and Series I Bonds
Federal taxation of interest income on Series I bonds is applicable; state and local taxes are not. No interest will be paid since the series I bond has zero coupons. Instead, the interest generates interest on interest and is reinvested into the bond’s value. The accrual or cash methods are the two taxing options for the bondholder.
Tax is only due when the bonds are redeemed using the cash option. Therefore, taxation will only occur upon the bond’s sale if a taxpayer hangs onto it for seven years before selling it. On the other hand, taxes on the imputed interest gained are imposed annually when using the accrual approach.
If the revenue from Series I bonds is used to fund higher education, it may sometimes be exempt from federal taxes. The interest on an I bond is tax-free if sold, and the earnings are used to cover qualifying higher education costs at an approved school during the same calendar year.
Where can I purchase savings bonds in Series I?
Only via the TreasuryDirect website may one acquire U.S. savings bonds, including Series I bonds, from the U.S. Treasury online. You may buy Series I bonds using your federal tax return as well.
If I use my tax refund to buy U.S. Series I Savings Bonds, which tax form do I need to complete?
If you acquire U.S. savings bonds using your income tax refund, you must fill out IRS Form 8888 and submit it with your tax return.
The IRS will send your U.S. savings bonds to you.
What Are the Past Interest Rates on U.S. Savings Bonds in Series I?
For I bonds issued between May 2022 and October 2022, the aggregate rate is 9.62 percent.
This rate is effective for the first six months you possess the bond. The composite rate, which accounts for inflation at the time of issuance, is a fixed and variable interest rate component of every Series I bond issue. Here is a table that displays the fixed and variable components historically.
How Much Time Does a Series I Bond Take to Develop?
These bonds have a 30-year ultimate maturity that consists of a 20-year initial maturity term and a 10-year extended maturity period. They are issued at face value.
“Purchasing Series I Savings Bonds,” TreasuryDirect.
Correction: As of May 17, 2022, the composite rate has been adjusted in the Series I Bonds FAQs.
Conclusion
- An interest-bearing, non-marketable U.S. government savings bond is a series I bond.
- Series I bonds are regarded as low-risk investments that give investors a return on their capital and protection against inflation.
- The secondary markets do not allow the bonds to be purchased or traded.
- For the bond’s duration, Series I bonds have a fixed interest rate, and every May and November, the inflation rate is variable and subject to change.
- These bonds have a 30-year total maturity, a 20-year original maturity, and a 10-year extension term.
