Saving Bonds - Your Guide To US, UK & Canadian
Savings Bonds

Having
looked at the EE series **saving bonds** in detail, let's do the same with the I
series. Now i saving bonds are similar to EE bonds, but the way interest is paid is
treated very differently. The reason they are called i saving bonds, is the the 'I'
stands for inflation and series I bonds, have an interest rate which is tied
to the inflation rate. So in other words they are in theory 'future proofed' with your
investment keeping pace with inflation. Let's have a look at the various
aspects of the I saving bonds and how they work.

Just like the ee saving bonds that we looked at earlier, i saving bonds have features that make them attractive to many investors. As we will see in a minute they are very similar in many ways to the EE series, but the principle difference is in the calculation of interest rates. Originally i saving bonds were only sold as paper based certificates - now they are available in both paper and electronic form.

The I bond interest rate is a combination of two different rates, namely a fixed rate and an inflation linked rate. The fixed rate is announced each May and November and applies to all bonds issued during the six month period beginning with the announcement date. This rate then remains the same for the life of the bond. The inflation rate is announced in May and November as for the fixed rate, and is based on the Consumer Price Index figures for urban consumers ( CPI-U) . This figure is then combined with the fixed rate to determine the combined interest rate for the following six month period. Below I have included a table for both the fixed and variable rates since the launch of the I series savings bond.

Date | Fixed Rate % | Variable Rate % |

May 1st 2008 | 0.00 | 2.42 |

November 1st 2007 | 1.20 | 1.53 |

May 1st 2007 | 1.30 | 1.21 |

November 1st 2006 | 1.40 | 1.55 |

May 1st 2006 | 1.40 | 0.50 |

November 1st 2005 | 1.00 | 2.85 |

May 1st 2005 | 1.20 | 1.79 |

November 1st 2004 | 1.00 | 1.33 |

May 1st 2004 | 1.00 | 1.19 |

November 1st 2003 | 1.10 | 0.54 |

May 1st 2003 | 1.10 | 1.77 |

November 1st 2002 | 1.60 | 1.23 |

May 1st 2002 | 2.00 | 0.28 |

November 1st 2001 | 2.00 | 1.19 |

May 1st 2001 | 3.00 | 1.44 |

November 1st 2000 | 3.40 | 1.52 |

May 1st 2000 | 3.60 | 1.91 |

November 1st 1999 | 3.40 | 1.76 |

May 1st 1999 | 3.30 | 0.86 |

November 1st 1998 | 3.30 | 0.86 |

September 1st 1998 | 3.40 | 0.62 |

To show you how the composite rate is calculated I have taken an
example based on the most recent** i saving bonds** issued in May 2008 to
October 2008. Now the fixed rate as shown above is 0.00%, and the CPI -
U half yearly inflation rate was 2.42%. In order to calculate the
composite rate we use the following formula :

Composite rate = [Fixed rate + (2 x half yearly inflation rate) + (fixed rate x half yearly inflation rate)]

Composite rate = [0.000 + (2 x 0.0242) + (0.0000 x
0.0242)]

Composite rate = [0.000 + 0.0484 + 0.0000000]

Composite rate = [0.0484]

Composite rate = 0.0484 x 100%

Composite rate = 4.84%

So for the i saving bonds for this period the composite rate is 4.84%.

Now let's look at the general rules that apply when purchasing i series saving bonds which as I have said earlier are very similar to the E series bonds:

Information | Detail |

Denominations available | $50, $75, $100, $200, $500, $1,000, $5,000, $10,000 |

Interest period | 30 years |

Payment | I bonds are always paid at full face value |

Interest Payment | Interest is paid and accrued monthly, for full month periods only |

Early penalty | Applies for encashment before 5 years. You will forfeit the last three months of interest. After 5 years no further penalties apply. |

Annual Allowance | Maximum of $5,000 I series paper bonds per annum as well as $5,000 I series electronic bonds per year. |

Redemption/Exchange | Not permitted within the first year of ownership |

Federal Tax | Interest is required to be reported, either annually as it accrues, or on redemption of the bond. Some tax can be offset under the Education Savings Bond Programme where these have bee used for higher education purposes - please consult a tax expert if in doubt. |

I haven't duplicated the other table here as the terms of ownership are the same for EE series bonds. In total between the four types ( EE paper/electronic and I paper/electronic ) you can purchase a maximum of 5 x $5,000 ( ($20,000) saving bonds per year.

Now the question of-course is which are the best saving bonds to buy and when should you be buying I series, and when should you be buying EE series ? This is down to your judgement of where you believe interest rates are heading in the future, and what you believe may happen to the economy and inflation in the long term. In general terms in a period of rising inflation then interest rates will probably be rising as well. Therefore since the EE bond is directly related to the T-bill treasury rate, then the ee saving bonds will also rise. Conversely during a period when inflation is falling, then interest rates will also tend to fall and the ee saving bonds interest rate will fall accordingly.

Now for the i saving bonds, this generally increases in value monthly when inflation is in the economy, and decrease during periods of deflation. In fact in sustained periods of deflation the bond value could remain unchanged. As always it is for you to decide where you believe interest rates and inflation are heading in the long term. At present, the US economy is entering a phase of sustained recession ( as are many other Western nations) and as such interest rates are being cut aggressively by the FOMC in an attempt to stimulate the economy, so at present we are in a deflationary period. How long this period will last is anyone's guess, but my own view is that this could be a prolonged period. However, one must also bear in mind that saving bonds are for the long term, not the short term, so our horizon must be the next 10, 15 or 20 years, not the next 2- 3 years.

I hope that's given you a better understanding of the US saving
bonds, and if you would like further information on buying, selling or
investing in these long term investments, please just follow the link to the
Treasury Direct site for saving bonds
information, help and advice. Now we'll take a look at the UK **saving
bonds** currently available.