In this low yield environment savers have a tough time finding low or no risk return over 1%. I-Bonds offer the best alternative for savers these days. The current rate is 4.6% through October 31, 2011. The maximum purchase per year per person is $10,000 ($5,000 online from TreasuryDirect and $5,000 from your bank). The interest on I-Bonds is has two components: a fixed rate and a variable rate base on the CPI-U (consumer price index for urban consumers). This bond is basically a hedge against inflation and if you buy now before the rates are adjusted on Nov. 1 you will get the 4.6% for the next 6 months (effectively 2.3%).
Here are additional facts on I-Bonds:
- You can redeem them at any time after a twelve-month minimum holding period
- Interest, if any, is added to the bond monthly and is paid when you redeem the bond
- I Bonds are sold at face value; i.e., you pay $50 for a $50 I Bond
- I Bonds grow in value with inflation-indexed earnings for up to 30 years
- If you redeem I Bonds before they’re five years old, you’ll forfeit the three most recent months’ interest; at or after 5-years old, you won’t be penalized
I-Bonds can earn zero percent in a deflationary environment but the holder is guaranteed his/her principle.