Inflation Protection: I Savings Bonds
I Bonds are accrual securities, which means that you do not receive interest payments (coupon income) until you redeem the bonds. But taxes on interest can be deferred until the bonds are redeemed or until maturity-that is, for up to 30 years. In addition, interest income is exempt from state and local taxes.
The earnings rate of I Bonds is a combination of two separate rates: a fixed rate of return, and a variable semiannual inflation rate. The fixed rate is set when the bonds are initially sold, and it remains the same throughout the life of the bond. But the semiannual inflation rate adjustment is reset every six months, based on the CPI-U.
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In the unlikely event that deflation were to occur, the value of the bond would remain at its pre-deflation level. The combined rate does not simply add the two rates: They are combined according to a complex formula explained on the Treasury's Web site.
I Bonds have several major advantages:
- The value of the I Bonds rises at the rate of inflation.
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