I Bonds : A Product Review
What’s the trick to getting almost a ten percent return on bonds in 2022? With the stock market S&P500 returning 10 percent yearly, who would buy bonds? Consider this: I- Bonds are returning 9.62 percent! Read this blog to find out what it’s about!
What are I Bonds?
But what are Inflation Bonds? They’re inflation-fighting, government-issued bonds designed to offset the adverse effects of inflation on your investment portfolio.
Usually, when you buy ordinary EE series bonds, you get a fixed interest rate. It remains the same even as the buying power of your average dollar declines. It’s not just ordinary bonds that lose value; all your stock investments suffer similar declines because of inflation. Check your budget and see where you’re suffering inflationary woes.
The interest rate directly mirrors the inflation rate so that I-Bonds might look attractive as a product in an inflationary era.
The rate of return is adjusted regularly to keep up with the rise in prices, and the bonds are safe government-issued product that helps you avoid losing value during inflationary times. The maturity is 30 years, but you won’t suffer an interest penalty if you cash out at five years. The interest penalty amounts to only 3 months of interest if you cash out after only one year.
Who Issues Bonds?
In general, bonds can be issued by a private company like a railroad, a municipal government, or a federal government when it wants to raise funds by other means than taxation.
By buying bonds, you are, in effect, lending money to the issuer. You will get a return on your investment at intervals during the lending period. You get your money back with interest when the bond matures.
Be a Creditor Rather than a Debtor
Investors like that they become a creditor when they buy a bond, as opposed to buying stock, where they buy a piece of the company and are owners, subject to the owners’ risks. So, a bondholder will get the money back because they’re a creditor, whereas a stock investor could lose their shirt. So, investors like bonds, but the low rate of return tempers the affection.
That’s what’s so attractive about these bonds during times of high inflation. The rate of return is keyed to inflation. If the inflation rate goes up, so too does the rate of return on the I-Bond.
The Natural Advantage of I Bonds
So if the inflation rate is 8.5% in August of 2022, then the return on the I Bond note would be a combined fixed rate and an inflation-adjusted rate. According to Forbes Advisor, your inflation-interest earned is added to the Bond’s principle, and the I Bond keeps going up in value. Your I Bond also earns interest every month.
Check out the rate calculator.
Recessions are rare, and inflation hasn’t registered in negative figures in decades. Even when inflation is low, the return on an I Bond is higher than any savings account rate.
Disadvantages of I Bonds
While the security and yield of I Bonds during inflationary times make them attractive to investors, some disadvantages dampen enthusiasm. Here are the most annoying features:
- They’re subject to the inflation rate
- The funds aren’t easily accessible
- There’s a cap on I Bonds of $10000 annually
When you buy I Bonds, you do so believing that inflation will continue. Unfortunately, inflation is a negative economic factor, and there’s forces aligned against it. But the reduction of inflation involves raising taxes and cutting spending, difficult tasks alone in today’s politics.
Secondly, with most investments, accessing funds is difficult. Invest in an I Bond, and you must wait 12 months to get any return on your investment. In the first five years, cash out your I bond, and you’ll lose the last three months of interest earned. And the full maturity date isn’t reached for 30 years. On the upside, if you invested $1000 in I Bonds in 1999, today your investment would be worth $3740.
Finally, for investors who love that 9.62 interest returned, you can only invest $10,000 a year.
If you liked this article, please sign up below for my newsletter:
