I Bonds are U.S. Savings Bonds that are designed to deliver inflation protection. Like traditional EE Bonds, I Bonds permit holders to defer federal income tax until redemption while the interest is exempt from state and local income tax.
With I Bonds, investors’ interest has two components:
1. You get a fixed return, which is re-set every six months, in November and May. This fixed return is what you will receive as long as you own your I Bonds.
2. You also get a variable rate, which will change each November and May.
Until November 2006, newly-purchases I Bonds will have a fixed return of 1.40 percent and a variable rate of 1 percent so the total annualized return is 2.41 percent. Therefore, you may want to wait until November to buy I Bonds because the yield probably will go higher, reflecting rising inflation and interest rates.
After you buy I Bonds, you can’t cash them in for 12 months. If you redeem bonds within five years of their purchase, you’ll lose three months of interest.