For conservative investors, inflation is the number one destroyer of the value of money. These investors hold mostly bonds, which sometimes yield less than the amount of inflation. Savings bonds, while usually not used as a typical investment, also face this problem over their long maturities. The U.S. Treasury recognized this and issued a new bond that removes some of the downside from inflation. These saving bonds are called Series I Savings Bonds.
What are Series I Savings Bonds?
As said above, Series I savings bonds are designed for the bondholders to not lose that much money from the effects of inflation. These bonds are sold in different denominations depending on how they are purchased. Online bonds cost a minimum of $25 and can be bought in any denomination within a penny, up to $5000. Paper bonds purchased must be in the denominations of $50, $75, $100, $200, $500, $1000, $2000, or $5000. Unlike most savings bonds, buyers pay the full denomination for the bond. I savings bonds come with two different interest rates: a fixed rate and an inflation rate. The interest rate investors get paid is based on a formula that combines both rates in a composite rate. While the inflation rate can be negative in deflationary periods, the bonds will never lose money due to deflation.
Buying Series I Bonds: Electronically
The easiest way to buy Series I savings bonds online is to use Treasury Direct, a site directly run by the government. Investors can own an account on Treasury Direct where they hold all their bonds, whether they are savings bonds, treasury bonds, treasury bills, or any other U.S. treasury product. The site also lets investors redeem their bonds without the need to deal with a bank or other financial institution. Using this method, buyers can buy any denomination of bond that’s above $25 dollars, within a penny. This means electronic bonds with value like 100.06 can exist. A maximum of $5000 of savings bonds can be purchased in one calendar year (this also applies to paper bonds.)
Buying Series I Bonds: Paper
There are two main ways to buy paper Series I savings bonds; both involve using a bank or another financial institution. Investors can either go to the bank and order a bond or purchase the bond using a bank’s internet system. Most banks have direct access to the Treasury and can easily order savings bonds for its customers. Just ask the tellers who is in charge of investment and other customer purchases. Buying bonds electronically on a bank’s system works the same way, with the bonds being mailed to the customer. Using this method forces the buyer to get bonds in specific denominations, which were listed above.
While knowing how to purchase savings bonds is great, every buyer also needs to know how to redeem the bonds. Series I savings bonds can only be redeemed after 12 months of ownership. However, if they’re redeemed in their first five years, three months of interest is deducted as a penalty. This is standard fair for many savings bonds. For bondholders who have an account on Treasury Direct, they simply follow directions on the site and the money is deposited in their bank account usually within one business day. Holders of paper bonds have to go to their local financial institution. The Treasury doesn’t keep a list of banks that redeem savings bonds, so bondholders should call ahead. Keep in the mind there is a $1000 minimum redemption amount unless the redeemer goes to a Treasury Retail Securities Site. More information about this is available online.
Whether they’re used as an inflation-protected investment or as a gift, Series I savings bonds are another great offering from the U.S. Treasury. Like many other Treasury products. The act of purchasing the bonds is easy and made convenient by the infrastructure developed at Treasury Direct. But before you buy any financial product, consult your advisor. Only they know the best products for your situation.
http://www.treasurydirect.gov/ : Treasury Direct