Questions about US Government I bonds have been coming up recently during our client meetings about whether these investments are right for you. The answer to that question is they may NOT be right for everyone so let’s first discuss what a US Government I bond is and how it works. An I bond is a variable rate bond which means it earns interest based on two factors combining both a fixed rate (which has historically been under 1%) and an inflation rate. As a lot of us have seen in the news and media the current rate is north of 9% but it is important to remember you will not get this rate every year because this rate will vary; it is not guaranteed.
Every six months from the bond's issue date, interest the bond earned in the six previous months is added to the bond's principal value, creating a new principal value. Interest is then earned on the new principal. In addition to the fixed rate that you get at the time you buy the bond, the Inflation rate can fluctuate.
The inflation rate is set every six months (on the first business day of May and on the first business day of November), based on changes in the non-seasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U) for all items, including food and energy.
However, the change is applied to your bond every six months from the bond's issue date.
Some other important facts are you cannot cash your I bond in the first 12 months; they are intended to be longer term investments. If you redeem the bond within the first 5 years you will lose your last 3 month’s interest.
If you have any questions on your individual situation or with the article I have enclosed, please feel free to reach out to our Advisory Team for a further discussion.