Inflation-linked savings bonds, also called Series-I bonds, are a kind of debt securities issued and supported by the U.S. government. The bond has no default risk and is well protected from inflation.
Inflation-linked savings bonds are suitable for retail investors because of their low risks. Low default risks also result in a low- interest rate. Yet the bonds are exempt from income tax.
The bond is sold at face value, and the rate on the bond will be paid at maturity. You have to hold the bond for at least 5 years. Otherwise, you may lose 3 months of earned interest.
Similar to other savings bonds, Series-I bonds cannot be transferred and they do not trade on a secondary market. This means the bonds need to be redeemed by the original buyer or the buyer’s estate.
Inflation-linked savings bonds are related to the movements of the consumer price index (CPI), which is a measure of inflation. Generally speaking, the outstanding principal of the bond rises with inflation. Therefore, as inflation occurs, the bond’s par value will increase. The interest of the bond can also be adjusted based on inflation.
The advantages of inflation-linked savings bonds
As a government-issued bond, the Series-I bond is generally free from default risks. Besides, adjustment made for inflation can lead to higher returns on the bonds in certain conditions (usually over 30 years), although the interest will also be adjusted for inflation. With the features of Series-I bonds, the great influence of inflation on the holders of the bonds can be largely softened.