I-Bonds  have received a ton of press lately, especially from personal finance bloggers, and they appear to be a better alternative for your savings than certificates of deposit (CDs). CDs have a fixed rate (usually tied to its length) and I-Bonds have a fixed and inflation-adjusted rate (independent of the length you hold it). I-Bond income is exempt from state and local taxes and even exempt from Federal taxes if you spend the income on eligible educational expenses. As a treat, you can now purchase I-Bonds via Treasury Direct  (an online resource) and never deal with a paper certificate (and enjoy a lot of new flexibilities).
About Series I Bonds
The government website has a great page detailing the mechanics of an I-Bond and it’s pretty simple to understand:
Current Rate: 4.80% through October 2005
Minimum purchase: $50 for a $50 I Bond when purchasing paper bond certificates; $25 for a $25 I bond when purchased electronically via TreasuryDirect
Maximum purchase: $30,000 in TreasuryDirect and $30,000 in paper bonds
- Paper bonds: $50, $75, $100, $200, $500, $1,000, $5,000, $10,000, or,
- Electronic bonds via TreasuryDirect: purchase to the penny for $25 or more
Issue Method: Paper bond certificates or electronic transfer to TreasuryDirect accounts
Early redemption rules work as follows: If you owned it for less than 5 years, you must forfeit the last 3 months of interest income. If you owned it for more than five years, you forfeit nothing. You must own it for a minimum of 1 year.
Another beauty of buying bonds, any bonds, these days is Treasury Direct. You can do all your purchasing, tracking, and redemption’s entirely online – a treat for the always-connected digital generation, of which I am a happy member of. If you’re not comfortable with doing your transactions online, the traditional offline methods work as well but do not afford you some flexibilities – such as partial redemption . As you can see from Jon’s experience, you can redeem part of your bond (something impossible traditionally) as long as you redeem more than $25 and your bond’s value, after the partial redemption, is still greater than $25. Another benefit is that you can purchase a bond for any value, down to the penny, as long as it’s greater than $25. (If you have a paper bond and want to convert it, read these instructions )
Predicting Series I Bond Rate
The website will list the current rate of return for an I-Bond but for predicting the future, Jon at My Money Blog has a great math-heavy post on predicting future I-Bond rates . The rate of return has a fixed rate component and an inflation adjusted rate component (both announced twice a year at May and November). If you had a chance to read Jon’s post then you’ll learn that there is a bit of predictability as to what the future inflation based rates will hold but predicting the changes in the fixed rate is not as simple.
There is also a potential risk associated with I-Bonds that isn’t typical of your typical bond – in a period of deflation, you can lose money with an I-Bond. If there is deflation, the inflation adjusted rate would be negative and there is a possibility (however remote) that it could go so far negative the total rate of return is negative. Of course, you would sell your bond in that scenario if you were outside the 1 year minimum hold period. For what it’s worth, the government has said that if the theoretical rate were to fall under 0%, they wouldn’t take back earnings and the bond would earn nothing.
In a few minutes I’ll be opening a Treasury Direct account, which has been explained as a 5 minute process, even though I don’t plan on purchasing any I-Bonds (I have a 7.5% second mortgage I have to pay off before I’ll consider any investment options).