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Early Redemption Options

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Should I Invest in Inflation Indexed Bonds?

Published September 2, 2012 | By christine.sullins

Inflation Indexed Bonds

When Inflation Rates are High, you might be worried about what’s going to happen to your savings. Inflation series bonds are one option to consider. These unique investments have the ability to fight inflation and protect your savings from total devastation.

Types of Inflation Indexed Bonds

There are two different types of inflation indexed bonds issued by the U.S. Treasury one is called the Series I Savings Bond and the other is called TIPS or Treasury Inflation Protected Securities.

Series I inflation Indexed Bonds-

Inflation series I bonds are purchased at face value. Unlike zero coupon bonds or T-Bills, you cannot buy inflation series bonds at a discount. Instead interest rates paid are based on a sort of complex formula made up of two components. The first component is a base interest rate and it remains the same for the life of the bond. The second component is an inflation adjustment that is calculated every May and November. When inflation is high this will boost the return on your i-Series Inflation Indexed bond. Fixed rates and semiannual inflation rates are combined to determine composite earnings rates. An I Bond’s composite earnings rate changes every six months after its issue date. Interest is accrued monthly but not paid until maturity or early redemption. The differential is based on the Consumer Price Index.

Early Redemption Options

No matter the maturity of your I-Series Inflation Indexed Bond, you can cash in your bonds at any time after a minimum holding period of 12 months. You get all of the accrued interest, making it a flexible type of investment. Unlike some investments, with multi-year deferred sales charges and penalties for early termination, inflation protected bonds allow you to move into and out of your investment on a year-by-year basis giving you a fair amount of flexibility in your investment strategy.

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