Uncle Sam has unveiled the I-bond, a new option for savers who are concerned that inflation won't always be as tame as it is today. I-bonds are close cousins to the familiar EE savings bond - the traditional college savings gift. Like EE bonds, interest on I-bonds can be completely tax-free if used to pay for college tuition. For details, see (www.-publicdebt.treas.gov).But there are two major differences between the I and EE: The interest rate on I-bonds has two components - a fixed rate that is set when you buy the bond, plus a variable rate, based on the rate of inflation, that changes every six months.
If you purchased a bond with a 3.5 percent fixed rate and an inflation-based adjustment of 1.5 percent, you'd earn 5 percent on the bond during the first six months. If the inflation-based rate jumped to 2 percent six months later, you'd then be earning 5.5 percent on the bond.
You buy I-bonds at face value (from $50 to $10,000), instead of at half the face value. That means you won't look quite as generous when you give an I-bond as a gift.
Both I- and EE bonds earn interest for 30 years, can be purchased at banks or through payroll deduction and are backed by the full faith and credit of the U.S. government.
You can redeem your bonds after six months, but you forfeit three months' worth of interest if you cash them in before you've held them for five years.
But there really isn't much appeal for these new bonds. They may typically earn less than EEs, even with the inflation adjustment. After all, the return on series EE bonds changes every six months to reflect market interest rates (and therefore inflation).