I- Bonds: A brief overview:
In the current shaky economy, everyone is looking for safe and secure investments. Investors might have a chance at high rewards with stocks and corporate bonds, but there’s also a huge risk to putting money in either. The snowballing crises in Europe aren’t making foreign investments look any more tempting. Where can investors trust their finances if they want a solid risk free return on their investment?
Well, for those of you who want to play it cool and safe with your investments, you might consider: I bonds.
What are I-Bonds?
First of all, I-Bonds are officially called Series I Savings Bonds. According to the U.S. Department of Treasury, I bonds are “a low-risk, liquid savings product.” I bonds are government-issued and therefore carry very little risk as a long term investment. The value and interest of I bonds are adjusted every six months according to the current inflation numbers, which saves the investor from ever losing out on their initial investment upon issue of the bond. In theory, I bonds should never lose out on their initial value since they’re constantly corrected by the inflation (or deflation) rate. They’re low risk (but also low reward) investments meant to protect investors from market volatility. However, in a low inflation environment the return can be lower than other government bonds. Plus due to early withdrawal penalties it can be a less than optimal investment.
Early Withdrawal Penalty on I-Bonds:
An I-Bond is issued with a maximum 30 year maturity. Someone who wants to cash in their I bond early isn’t allowed to do so for the first year. After a year, you can redeem your I-Bonds at their current value, but the value will suffer a three month interest penalty for early withdrawal. After five years the I bonds can be redeemed without suffering a penalty for early withdrawal.
How I bonds can help your business
I-Bonds can prove invaluable to businesses as well as individuals, who want to secure capital and general funds in a safe and controlled investment plan. The fact that the value of I-Bonds adjusts to current inflation rates means that an investor shouldn’t lose purchasing power should inflation begin to roar out of control and so it’s nearly guaranteed that you’ll get your original investment back plus interest. The entire risk is that things get so bad that the Government can’t print enough money to meet its obligations and thus defaults.
You might not reap huge profits from an I-Bond, that’s not part of its design. They’re built to safely invest funds during uncertain financial times, when inflation expectations are high.
Know anything else about I bonds? Feel free to jump into the conversation and post a comment below!
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PVS Shankar says
Is there a room for the Govt. to default in payment against I Bonds in a crisis situation? Thanks.
Tim McMahon says
Governments do all kinds of things in a “Crisis” even if they are the ones that created it in the first place. You don’t even have to look very far into the past. Just look at Cyprus and Argentina have done in the last few months. So you need to factor the likelihood of anything like that happening into any investment you make. Unfortunately, the results of some crisis are unknowable until after the fact so that is a good reason to spread the risk around among a variety of different investments based in different countries in different industries etc.